UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended:
SEPTEMBER 30, 2001
Commission file number: 1-10853
BB&T CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 56-0939887
(State of Incorporation) (I.R.S. Employer Identification
No.)
200 West Second Street
Winston-Salem, North Carolina 27101
(Address of Principal Executive (Zip Code)
Offices)
(336) 733-2000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
At October 31, 2001, 453,058,500 shares of the registrant's common stock, $5
par value, were outstanding.
This Form 10-Q has 36 pages. The Exhibit Index begins on page 32.
BB&T CORPORATION
FORM 10-Q
September 30, 2001
INDEX
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)........................... 2
Consolidated Financial Statements............................ 2
Notes to Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of
Operations................................................. 14
Analysis of Financial Condition.............................. 14
Market Risk Management....................................... 19
Capital Adequacy and Resources............................... 22
Analysis of Results of Operations............................ 23
Item 3. Quantitative and Qualitative Disclosures About Market
Risk....................................................... 19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 32
Item 6. Exhibits and Reports on Form 8-K........................... 32
SIGNATURES............................................................ 36
1
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
September 30, December 31,
2001 2000
------------- ------------
(unaudited)
Assets
Cash and due from banks............................ $ 1,614,539 $ 1,715,284
Interest-bearing deposits with banks............... 106,431 61,706
Federal funds sold and securities purchased under
resale agreements or similiar arrangements........ 264,481 329,637
Trading securities................................. 116,523 96,719
Securities available for sale...................... 16,679,755 15,231,123
Securities held to maturity (approximate market
values of $38,368 at September 30, 2001, and
$623,932 at December 31, 2000).................... 38,379 622,102
Loans held for sale................................ 1,700,400 906,244
Loans and leases, net of unearned income........... 45,449,036 43,920,831
Allowance for loan and lease losses............... (634,552) (578,107)
----------- -----------
Loans and leases, net............................ 44,814,484 43,342,724
----------- -----------
Premises and equipment, net........................ 971,337 928,956
Other assets....................................... 4,002,717 3,318,328
----------- -----------
Total assets.................................... $70,309,046 $66,552,823
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing deposits...................... $ 6,356,051 $ 6,178,233
Savings and interest checking..................... 3,094,104 3,397,973
Money rate savings................................ 13,156,255 11,853,614
Time deposits..................................... 22,607,819 22,447,499
----------- -----------
Total deposits.................................. 45,214,229 43,877,319
----------- -----------
Short-term borrowed funds.......................... 5,923,442 7,309,978
Long-term debt..................................... 11,408,329 8,646,018
Accounts payable and other liabilities............. 1,793,218 1,299,699
----------- -----------
Total liabilities............................... 64,339,218 61,133,014
----------- -----------
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares
authorized, none issued and outstanding.......... -- --
Common stock, $5 par, 1,000,000,000 shares
authorized; issued and outstanding 452,984,331 at
September 30, 2001, and 453,307,379 at December
31, 2000......................................... 2,264,922 2,266,537
Additional paid-in capital........................ 332,782 423,404
Retained earnings................................. 2,989,604 2,632,642
Unearned income and unvested restricted stock..... (3,592) (7,071)
Accumulated other comprehensive income, net of
deferred income taxes of $249,422 at September
30, 2001, and $77,092 at December 31, 2000....... 386,112 104,297
----------- -----------
Total shareholders' equity...................... 5,969,828 5,419,809
----------- -----------
Total liabilities and shareholders' equity...... $70,309,046 $66,552,823
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
For the Three Months For the Nine Months Ended
Ended September 30, September 30,
------------------------- -------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Interest Income
Interest and fees on
loans and leases...... $ 955,007 $ 1,000,603 $ 2,928,480 $ 2,863,671
Interest and dividends
on securities......... 255,621 252,010 770,476 715,570
Interest on short-term
investments........... 3,522 7,348 14,947 22,160
------------ ------------ ------------ ------------
Total interest
income............... 1,214,150 1,259,961 3,713,903 3,601,401
------------ ------------ ------------ ------------
Interest Expense
Interest on deposits... 382,222 445,852 1,253,755 1,227,009
Interest on short-term
borrowed funds........ 55,507 95,463 202,658 305,061
Interest on long-term
debt.................. 154,110 132,549 455,156 329,251
------------ ------------ ------------ ------------
Total interest
expense.............. 591,839 673,864 1,911,569 1,861,321
------------ ------------ ------------ ------------
Net Interest Income..... 622,311 586,097 1,802,334 1,740,080
Provision for loan and
lease losses.......... 68,500 40,714 159,318 99,229
------------ ------------ ------------ ------------
Net Interest Income
After Provision for
Loan and Lease Losses.. 553,811 545,383 1,643,016 1,640,851
------------ ------------ ------------ ------------
Noninterest Income
Service charges on
deposit accounts...... 88,383 75,978 255,955 214,559
Investment banking and
brokerage fees and
commissions........... 43,569 36,877 129,504 124,467
Mortgage banking
income................ 51,840 24,620 108,949 77,639
Trust income........... 22,931 21,246 71,936 61,208
Agency insurance
commissions........... 44,179 38,757 131,181 107,156
Other insurance
commissions........... 3,089 3,987 9,478 11,432
Other nondeposit fees
and commissions....... 48,351 42,697 141,468 119,051
Securities gains
(losses), net......... 2,423 (180,778) 91,751 (221,910)
Other income........... 30,920 27,388 74,173 75,569
------------ ------------ ------------ ------------
Total noninterest
income............... 335,685 90,772 1,014,395 569,171
------------ ------------ ------------ ------------
Noninterest Expense
Personnel expense...... 296,587 269,672 880,320 791,422
Occupancy and equipment
expense............... 84,360 79,999 247,800 228,959
Amortization of
intangibles........... 20,050 15,942 56,360 48,076
Other noninterest
expense............... 181,237 170,471 500,228 458,474
------------ ------------ ------------ ------------
Total noninterest
expense.............. 582,234 536,084 1,684,708 1,526,931
------------ ------------ ------------ ------------
Earnings
Income before income
taxes................. 307,262 100,071 972,703 683,091
Provision for income
taxes................. 85,296 27,597 277,008 216,325
------------ ------------ ------------ ------------
Net income............. $ 221,966 $ 72,474 $ 695,695 $ 466,766
============ ============ ============ ============
Per Common Share
Net income:
Basic................. $ .49 $ .16 $ 1.54 $ 1.03
============ ============ ============ ============
Diluted............... $ .48 $ .16 $ 1.51 $ 1.02
============ ============ ============ ============
Cash dividends paid.... $ .26 $ .23 $ .72 $ .63
============ ============ ============ ============
Average Shares
Outstanding
Basic................. 454,346,907 451,578,894 452,904,319 451,513,773
============ ============ ============ ============
Diluted............... 460,387,879 456,725,224 459,235,651 456,679,270
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 2001 and 2000
(Unaudited)
(Dollars in thousands)
Accumulated
Shares of Additional Retained Other Total
Common Common Paid-In Earnings Comprehensive Shareholders'
Stock Stock Capital and Other* Income Equity
----------- ---------- ---------- ---------- ------------- -------------
Balance, December 31,
1999, as restated..... 450,349,937 $2,251,750 $ 400,215 $2,323,297 $(335,073) $4,640,189
Add (Deduct)
Other comprehensive
income:
Net income........... -- -- -- 466,766 -- 466,766
Unrealized holding
gains (losses)
arising during the
period............. -- -- -- -- 43,198 43,198
Less:
reclassification
adjustment, net of
tax benefits of
$77,669............ -- -- -- -- (144,241) (144,241)
----------- ---------- --------- ---------- --------- ----------
Net unrealized gains
(losses) on
securities.......... -- -- -- -- 187,439 187,439
----------- ---------- --------- ---------- --------- ----------
Total other
comprehensive
income............... -- -- -- 466,766 187,439 654,205
----------- ---------- --------- ---------- --------- ----------
Common stock issued.. 3,716,768 18,584 59,506 -- -- 78,090
Redemption of common
stock............... (4,404,750) (22,024) (100,874) -- -- (122,898)
Cash dividends
declared on common
stock............... -- -- -- (294,593) -- (294,593)
Other................ -- -- -- 4,486 -- 4,486
----------- ---------- --------- ---------- --------- ----------
Balance, September 30,
2000.................. 449,661,955 $2,248,310 $ 358,847 $2,499,956 $(147,634) $4,959,479
=========== ========== ========= ========== ========= ==========
Balance, December 31,
2000, as restated..... 453,307,379 $2,266,537 $ 423,404 $2,625,571 $ 104,297 $5,419,809
Add (Deduct)
Other comprehensive
income:
Net income........... -- -- -- 695,695 -- 695,695
Unrealized holding
gains (losses)
arising during the
period............. -- -- -- -- 363,307 363,307
Less:
reclassification
adjustment, net of
tax benefits of
$32,113............ -- -- -- -- 59,638 59,638
----------- ---------- --------- ---------- --------- ----------
Net unrealized gains
(losses) on
securities.......... -- -- -- -- 303,669 303,669
Unrecognized loss on
cash flow hedge, net
of tax of
($11,768)........... -- -- -- -- (21,854) (21,854)
----------- ---------- --------- ---------- --------- ----------
Total other
comprehensive
income............... -- -- -- 695,695 281,815 977,510
----------- ---------- --------- ---------- --------- ----------
Common stock issued.. 12,120,252 60,602 281,005 -- -- 341,607
Redemption of common
stock............... (12,443,300) (62,217) (391,688) -- -- (453,905)
Cash dividends
declared on common
stock............... -- -- -- (338,733) -- (338,733)
Other................ -- -- 20,061 3,479 -- 23,540
----------- ---------- --------- ---------- --------- ----------
Balance, September 30,
2001.................. 452,984,331 $2,264,922 $ 332,782 $2,986,012 $ 386,112 $5,969,828
=========== ========== ========= ========== ========= ==========
-----
* Other includes unearned income and unvested restricted stock.
The accompanying notes are an integral part of these consolidated financial
statements.
4
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2001 and 2000
(Unaudited)
(Dollars in thousands)
2001 2000
----------- -----------
Cash Flows From Operating Activities:
Net income.......................................... $ 695,695 $ 466,766
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses................ 159,318 99,229
Depreciation of premises and equipment............. 86,130 72,217
Amortization of intangibles........................ 56,360 48,076
Accretion of negative goodwill..................... (3,799) (4,682)
Amortization of unearned stock compensation........ 3,479 4,486
Discount accretion and premium amortization on
securities, net................................... (5,426) (3,877)
Net decrease (increase) in trading account
securities........................................ (19,804) (39,322)
Loss (gain) on sales of securities, net............ (91,751) 221,910
Loss (gain) on disposals of premises and equipment,
net............................................... 3,900 1,554
Proceeds from sales of loans held for sale......... 5,512,281 1,565,358
Purchases of loans held for sale................... (1,568,060) (492,272)
Origination of loans held for sale, net of
principal collected............................... (4,692,974) (1,201,669)
Decrease (increase) in:
Accrued interest receivable........................ (721) (95,550)
Other assets....................................... (468,169) (986,222)
Increase (decrease) in:
Accrued interest payable........................... (15,900) (1,886)
Accounts payable and other liabilities............. 281,091 718,166
Other, net......................................... (67,524) (10,193)
----------- -----------
Net cash provided by (used in) operating
activities....................................... (135,874) 362,089
----------- -----------
Cash Flows From Investing Activities:
Proceeds from sales of securities available for
sale............................................... 1,072,588 4,760,720
Proceeds from maturities, calls and paydowns of
securities available for sale...................... 1,380,866 1,297,497
Purchases of securities available for sale.......... (2,434,831) (6,045,012)
Proceeds from maturities, calls and paydowns of
securities held to maturity........................ 1,100 83,693
Purchases of securities held to maturity............ (4,640) (130,887)
Leases made to customers............................ (96,432) (87,474)
Principal collected on leases....................... 80,435 67,786
Loan originations, net of principal collected....... (791,299) (3,285,320)
Purchases of loans.................................. (173,041) (386,619)
Net cash acquired (paid) in transactions accounted
for under the purchase method...................... 100,050 (23,272)
Purchases and originations of mortgage servicing
rights............................................. (160,829) (40,880)
Proceeds from disposals of premises and equipment... 7,755 9,853
Purchases of premises and equipment................. (134,472) (104,789)
Proceeds from sales of foreclosed property.......... 36,118 19,886
Proceeds from sales of other real estate held for
development or sale................................ 5,282 6,565
----------- -----------
Net cash used in (provided by) investing
activities....................................... (1,111,350) (3,858,253)
----------- -----------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits................. 519,190 2,321,524
Net increase (decrease) in short-term borrowed
funds.............................................. (1,386,536) (1,174,041)
Proceeds from long-term debt........................ 3,419,067 6,147,633
Repayments of long-term debt........................ (710,079) (3,823,729)
Net proceeds from common stock issued............... 53,546 30,116
Redemption of common stock.......................... (453,905) (122,898)
Cash dividends paid on common stock................. (315,235) (272,067)
Other, net.......................................... -- (21)
----------- -----------
Net cash provided by (used in) financing
activities....................................... 1,126,048 3,106,517
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (121,176) (389,647)
Cash and Cash Equivalents at Beginning of Period..... 2,106,627 2,331,051
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,985,451 $ 1,941,404
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest........................................... $ 1,843,542 $ 1,789,893
Income taxes....................................... 23,402 92,178
Noncash financing and investing activities:
Transfer of securities held to maturity to
available for sale................................ 587,263 322,543
Transfer of loans to foreclosed property........... 32,117 27,222
Transfer of other real estate owned to fixed
assets............................................ 143 3,675
Transfer of fixed assets to other real estate
owned............................................. 5,421 1,471
Tax benefit from exercise of stock options......... 16,620 3,672
Securitization of mortgage loans................... 251,269 747,067
The accompanying notes are an integral part of these consolidated financial
statements.
5
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
A. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
consolidated balance sheets of BB&T Corporation and subsidiaries (referred to
herein as "BB&T", "the Corporation" or "the Company") as of September 30, 2001,
and December 31, 2000; the consolidated statements of income for the three and
nine months ended September 30, 2001 and 2000; the consolidated statements of
changes in shareholders' equity for the nine months ended September 30, 2001
and 2000; and the consolidated statements of cash flows for the nine months
ended September 30, 2001 and 2000.
The consolidated financial statements and notes are presented in accordance
with the instructions for Form 10-Q. The information contained in the footnotes
included in BB&T's 2000 Annual Report on Form 10-K, as restated in BB&T's
Current Reports on Form 8-K filed on April 27, 2001, July 25, 2001, and
October 5, 2001, should be referred to in connection with the reading of these
unaudited interim consolidated financial statements. In certain instances,
amounts reported in the 2000 financial statements have been reclassified to
conform to the 2001 statement presentation. Such reclassifications had no
effect on shareholders' equity or net income.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Forward-Looking Statements
This report contains forward-looking statements with respect to the
financial condition, results of operations and business of BB&T. These forward-
looking statements involve risks and uncertainties and are based on the beliefs
and assumptions of the management of BB&T, and on the information available to
management at the time that these disclosures were prepared. Factors that may
cause actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
(1) competitive pressures among depository and other financial institutions may
increase significantly; (2) changes in the interest rate environment may reduce
margins; (3) general economic conditions, either nationally or regionally, may
be less favorable than expected, resulting in, among other things, a
deterioration in credit quality and / or a reduced demand for credit;
(4) legislative or regulatory changes, including changes in accounting
standards, may adversely affect the businesses in which BB&T is engaged;
(5) costs or difficulties related to the integration of the businesses of BB&T
and its merger partners may be greater than expected; (6) expected cost savings
associated with pending mergers may not be fully realized or realized within
the expected time frame; (7) deposit attrition, customer loss or revenue loss
following pending mergers may be greater than expected; (8) competitors may
have greater financial resources and develop products that enable such
competitors to compete more successfully than BB&T; and (9) adverse changes may
occur in the securities markets.
6
B. Nature of Operations
BB&T is a financial holding company headquartered in Winston-Salem, North
Carolina. BB&T conducts its operations primarily through its commercial banking
subsidiaries which do business in North Carolina, South Carolina, Virginia,
Maryland, Georgia, West Virginia, Tennessee, Kentucky, Alabama and
Washington, D.C. BB&T's principal banking subsidiaries, Branch Banking and
Trust Company ("BB&T-NC"), Branch Banking and Trust Company of South Carolina
("BB&T-SC") and Branch Banking and Trust Company of Virginia ("BB&T-VA"),
provide a wide range of traditional banking services to individuals and
commercial customers. At September 30, 2001, BB&T was also the parent company
for 22 subsidiary banks acquired through mergers with Century South Banks, Inc.
and F&M National Corporation. These banks are expected to be merged with and
into BB&T-NC, BB&T-SC or BB&T-VA, as appropriate, based on the location of
their operations. Substantially all of BB&T's loans are to individuals residing
in the market areas described above or to businesses that are located in this
geographic area. Subsidiaries of BB&T's commercial banking units offer lease
financing to commercial businesses and municipal governments, investment
services (including discount brokerage services, annuities, mutual funds and
government and municipal bonds), life insurance and property and casualty
insurance on an agency basis and insurance premium financing. Direct nonbank
subsidiaries of BB&T provide a variety of financial services including
automobile lending, equipment financing, factoring, full-service securities
brokerage, investment banking and corporate finance services.
C. New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 133
("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities," on January 1, 2001. SFAS No. 133 established accounting and
reporting standards that require every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. In conjunction with the adoption of SFAS
No. 133, BB&T recorded a transition adjustment of $7.9 million, after taxes, to
accumulated other comprehensive income on January 1, 2001. There was no
material impact on net income at the date of adoption. Substantially all of the
transition adjustment is expected to be reversed into net income during 2001.
The notional amount of derivative financial instruments held by BB&T at
September 30, 2001, was $3.8 billion with unrealized net losses of
$2.4 million, compared to a total notional value of $2.2 billion with
unrealized net losses of $12.3 million at December 31, 2000. The transition
adjustment and third quarter 2001 impact of the statement are based on the
interpretive guidance issued thus far by the Financial Accounting Standards
Board ("FASB"). However, the FASB continues to issue guidance that could affect
BB&T's application of the statement and require adjustments to the transition
amount or amounts and disclosures in the consolidated financial statements. See
"Derivative Financial Instruments" herein for additional disclosures related to
the adoption of SFAS No. 133.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
replaces SFAS No. 125. SFAS No. 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration. The statements provide accounting and
reporting standards for such transactions based on consistent application of a
financial components approach that focuses on control. Under this approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes
liabilities when extinguished. Certain portions of the statement became
effective for transactions occurring after March 31, 2001. The adoption of
these provisions did not have a material impact on BB&T's consolidated
financial position or consolidated results of operations.
7
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." The provisions of the Statement apply to all business
combinations initiated after June 30, 2001. SFAS No. 141 requires that all
business combinations be accounted for by the purchase method of accounting.
This method requires the accounts of an acquired institution to be included
with the acquirer's accounts as of the date of acquisition with any excess of
purchase price over the fair value of the net assets acquired to be capitalized
as goodwill. The Statement also requires that the assets of an acquired
institution be recognized as assets apart from goodwill if they meet specific
criteria presented in the Statement. The Statement ends the use of the pooling-
of-interests method of accounting for business combinations, which required the
restatement of all prior period information for the accounts of the acquired
institution. BB&T has historically been a frequent acquirer and has used both
the pooling-of-interests and purchase methods of accounting. BB&T will account
for all mergers and acquisitions initiated after June 30, 2001, using the
purchase method.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes APB Opinion No. 17, "Intangible Assets." SFAS 142
addresses how intangible assets that are acquired individually or with a group
of other assets (but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition, and addresses how
goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. The Statement eliminates
the requirement to amortize goodwill and other intangible assets that have
indefinite useful lives, instead requiring the assets be tested at least
annually for impairment based on the specific guidance in the Statement. BB&T
will adopt the provisions of the Statement effective January 1, 2002, as
required, and apply the provisions of the Statement to all goodwill and other
intangible assets recognized in the financial statements. The Statement
requires a transition impairment test of goodwill and other intangibles in
conjunction with the initial application of the Statement. Any resulting
impairment loss will be reflected as a change in accounting principle. As of
September 30, 2001, BB&T had unamortized goodwill totaling $792.7 million,
unamortized core deposit intangibles and other intangible assets of
$43.0 million, and unamortized negative goodwill of $10.5 million, all of which
will be subject to the transition provisions of Statement No. 142. Amortization
expense related to goodwill and other intangibles was $64.6 million and
$56.4 million for the year ended December 31, 2000, and the nine months ended
September 30, 2001, respectively. Management has not yet determined the impact
of adopting SFAS No. 142, including whether any transitional impairment losses
will be required to be recognized as the cumulative effect of a change in
accounting principle.
8
D. Mergers and Acquisitions
The following table presents summary information with respect to significant
mergers and acquisitions completed by BB&T Corporation during 2000 and thus far
during 2001:
Summary of Completed Mergers and Acquisitions
(Dollars in millions)
Goodwill
Date of Accounting Goodwill Amortization
Acquisition Acquired Company Headquarters Total Assets Method Recorded Period
----------- --------------------------------- ------------------ -------------- ---------- ------------- ------------
August 9, 2001 F&M National Corporation Winchester, VA $ 4.0 billion Pooling $ N/A N/A
June 27, 2001 Virginia Capital Bancshares, Inc. Fredericksburg, VA 532.7 million Purchase 15.2 million 15 years
June 7, 2001 Century South Banks, Inc. Alpharetta, GA 1.7 billion Pooling N/A N/A
March 2, 2001 FirstSpartan Financial Corp. Spartanburg, SC 591.0 million Purchase 42.0 million 15 years
January 8, 2001 FCNB Corp. Frederick, MD 1.6 billion Pooling N/A N/A
-----------------------------------------------------------------------------------------------------------------------------
December 27, 2000 BankFirst Corporation Knoxville, TN $929.5 million Purchase $71.0 million 15 years
November 15, 2000 Edgar M. Norris & Co. Greenville, SC 3.7 million Purchase N/A N/A
September 20, 2000 Laureate Capital Corp. Charlotte, NC 13.8 million Purchase N/A N/A
July 6, 2000 One Valley Bancorp, Inc. Charleston, W.Va. 6.4 billion Pooling N/A N/A
June 15, 2000 First Banking Company of Statesboro, GA 420.0 million Pooling N/A N/A
Southeast Georgia
June 13, 2000 Hardwick Holding Company Dalton, GA 507.2 million Pooling N/A N/A
January 13, 2000 Premier Bancshares, Inc. Atlanta, GA 2.0 billion Pooling N/A N/A
BB&T Common
Shares Issued
Date of to Complete
Acquisition Transaction
----------- -------------
August 9, 2001 31.1 million
June 27, 2001 4.7 million
June 7, 2001 12.7 million
March 2, 2001 3.8 million
January 8, 2001 8.7 million
-----------------------------------------------------------------------------------------------------------------------------
December 27, 2000 5.3 million
November 15, 2000 N/A
September 20, 2000 N/A
July 6, 2000 43.1 million
June 15, 2000 4.1 million
June 13, 2000 3.9 million
January 13, 2000 16.8 million
The table above does not include mergers and acquisitions of acquired
companies prior to their acquisition by BB&T or insurance agency acquisitions,
which are summarized below.
During the nine months ended September 30, 2001, BB&T acquired five
insurance agencies that were accounted for as purchases. In conjunction with
these five transactions, BB&T issued approximately 326,000 shares of common
stock and recorded $15.1 million in goodwill, which is being amortized using
the straight-line method over 15 years. BB&T acquired six insurance agencies
during 2000, which were accounted for as purchases. In conjunction with these
2000 transactions, BB&T issued 1.4 million shares of common stock and recorded
$38.9 million in goodwill, which is being amortized using the straight-line
method over 15 years.
BB&T typically provides an allocation period, not to exceed one year, to
identify and quantify the assets acquired and liabilities assumed in business
combinations accounted for as purchases. Management currently does not
anticipate any material adjustments to the assigned values of the assets and
liabilities of acquired companies.
Pending Mergers and Acquisitions
On July 10, 2001, BB&T announced plans to acquire Community First Banking
Company ("CFBC") of Carrollton, Georgia. At the time of announcement, CFBC had
$548.1 million in assets and operated nine banking offices, a consumer finance
company, an insurance agency and a full-service brokerage subsidiary.
Shareholders of CFBC will receive .98 shares of BB&T common stock in exchange
for each share of CFBC common stock held. The transaction, which will be
accounted for as a purchase, is planned for completion in the fourth quarter of
2001.
On August 29, 2001, BB&T announced plans to acquire The Southeastern Trust
Company ("Southeastern"). Southeastern, a trust and asset management company,
has more than $700 million in assets under management and operates through
offices in Anderson, Charleston, Columbia and Greenville, South Carolina. The
transaction, which will be accounted for as a purchase, is expected to be
completed in the fourth quarter of 2001.
On October 9, 2001, Laureate Capital, LLC ("Laureate"), a commercial
mortgage banking subsidiary of BB&T, announced plans to acquire Horizon
Mortgage & Investment Company ("Horizon") of Atlanta,
9
Georgia. Horizon, with a loan servicing portfolio of $480 million, will give
Laureate its first loan production office in Georgia and will push loan
servicing volume to $5.2 billion. The transaction will be accounted for as a
purchase and is expected to be completed by the end of the year.
On November 8, 2001, BB&T announced plans to acquire AREA Bancshares
Corporation ("AREA"), of Owensboro, Kentucky. AREA has $2.95 billion in assets
and operates 72 banking offices in Kentucky. Shareholders of AREA will receive
.55 of a share of BB&T common stock in exchange for each share of AREA common
stock held. The transaction is expected to be completed in the second quarter
of 2002.
On November 8, 2001, BB&T announced plans to acquire MidAmerica Bancorp of
Louisville, Kentucky ("MidAmerica"). MidAmerica has $1.8 billion in assets and
operates 30 banking offices in and around Louisville, Kentucky. Shareholders of
MidAmerica will receive $8.13 and .7187 of a share of BB&T common stock in
exchange for each share of MidAmerica common stock held. This exchange ratio is
also subject to adjustment based on the outcome of an ongoing lawsuit. The
transaction is expected to be completed in the second quarter of 2002.
E. Calculation of Earnings Per Common Share
BB&T's basic and diluted earnings per common share amounts were calculated
as follows:
BB&T CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Periods as Indicated
For the Three Months For the Nine Months Ended
Ended September 30, September 30,
------------------------- -------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(Dollars in thousands, except per share data)
Basic Earnings Per Share:
Weighted average number
of common shares
outstanding during the
period.................. 454,346,907 451,578,894 452,904,319 451,513,773
============ ============ ============ ============
Net income............... $ 221,966 $ 72,474 $ 695,695 $ 466,766
------------ ------------ ------------ ------------
Basic earnings per
share................... $ .49 $ .16 $ 1.54 $ 1.03
============ ============ ============ ============
Diluted Earnings Per Share:
Weighted average number
of common shares........ 454,346,907 451,578,894 452,904,319 451,513,773
Add:
Dilutive effect of
outstanding options (as
determined by
application of treasury
stock method).......... 6,040,972 5,146,330 6,331,332 5,165,497
============ ============ ============ ============
Weighted average number
of common shares, as
adjusted................ 460,387,879 456,725,224 459,235,651 456,679,270
------------ ------------ ------------ ------------
Net income............... $ 221,966 $ 72,474 $ 695,695 $ 466,766
============ ============ ============ ============
Diluted earnings per
share................... $ .48 $ .16 $ 1.51 $ 1.02
============ ============ ============ ============
F. Segment Disclosures
BB&T's operations are divided into six reportable business segments: the
Banking Network, Mortgage Banking, Trust Services, Agency Insurance, Investment
Banking and Brokerage, and Treasury. These operating segments have been
identified based primarily on BB&T's existing organizational structure. The
segments require unique technology and marketing strategies and offer different
products and services. While BB&T is managed as an integrated organization,
individual executive managers are held accountable for the operations of the
business segments that report to them.
10
BB&T's strategies for revenue growth are focused on developing and expanding
client relationships through quality service delivery and an effective sales
culture. The segment results presented herein are based on internal management
accounting policies that are designed to support these strategic objectives.
Unlike financial accounting, there is no comprehensive authoritative body of
guidance for management accounting equivalent to generally accepted accounting
principles. Therefore, the performance of the individual segments is not
comparable with BB&T's consolidated results or with similar information
presented by any other financial institution. Additionally, because of the
interrelationships of the various segments, the information presented is not
necessarily indicative of the segments' financial performance if they operated
as independent entities.
Please refer to BB&T's Annual Report on Form 10-K, as restated in BB&T's
Current Reports on Form 8-K, filed on April 27, 2001, July 25, 2001, and
October 5, 2001, for a description of internal accounting policies and the
basis of segmentation, including a description of the segments presented in the
accompanying tables. There have been no significant changes from the methods
used to develop the segment disclosures contained therein.
The following tables disclose selected financial information for BB&T's
reportable business segments for the periods as indicated:
11
BB&T Corporation
Reportable Segments
For the Three Months Ended September 30, 2001 and 2000
Investment
Banking
Banking Network Mortgage Banking Trust Services Agency Insurance and Brokerage
----------------------- ---------------------- ----------------- ---------------- ------------------
2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
----------- ----------- ---------- ---------- ------- -------- -------- ------- -------- --------
(Dollars in thousands)
Net interest
income (expense)
from external
customers........ $ 337,916 $ 357,115 $ 155,911 $ 117,994 $(9,015) $(10,154) $ 180 $ -- $ 2,107 $ 2,810
Net intersegment
interest income
(expense)........ 135,896 124,240 (113,168) (97,597) 12,010 13,830 -- -- -- --
----------- ----------- ---------- ---------- ------- -------- -------- ------- -------- --------
Net interest
income........... 473,812 481,355 42,743 20,397 2,995 3,676 180 -- 2,107 2,810
----------- ----------- ---------- ---------- ------- -------- -------- ------- -------- --------
Provision for
loan and lease
losses........... 74,639 48,786 834 757 -- -- -- -- -- --
Noninterest
income from
external
customers........ 122,597 119,176 46,757 18,952 23,413 17,527 47,253 30,941 45,905 36,980
Intersegment
noninterest
income........... 67,110 30,560 -- -- -- -- -- -- -- --
Noninterest
expense.......... 267,057 255,759 22,657 12,578 14,657 10,938 33,415 21,392 47,100 39,087
Intersegment
noninterest
expense.......... 133,339 84,686 6,494 5,594 787 922 1,061 1,027 433 373
----------- ----------- ---------- ---------- ------- -------- -------- ------- -------- --------
Income before
income taxes..... 188,484 241,860 59,515 20,420 10,964 9,343 12,957 8,522 479 330
Provision for
income taxes.... 56,262 89,847 17,487 6,677 2,893 3,051 5,127 3,326 741 753
----------- ----------- ---------- ---------- ------- -------- -------- ------- -------- --------
Net income....... $ 132,222 $ 152,013 $ 42,028 $ 13,743 $ 8,071 $ 6,292 $ 7,830 $ 5,196 $ (262) $ (423)
=========== =========== ========== ========== ======= ======== ======== ======= ======== ========
Identifiable
segment assets... $37,915,025 $39,210,775 $9,029,370 $6,424,395 $48,530 $ 32,737 $125,129 $87,455 $742,244 $853,657
=========== =========== ========== ========== ======= ======== ======== ======= ======== ========
Treasury All Other Segments (1) Total Segments
------------------------ ----------------------- -----------------------
2001 2000 2001 2000 2001 2000
----------- ------------ ----------- ----------- ----------- -----------
Net interest
income (expense)
from external
customers........ $ 62,350 $ 24,823 $ 123,318 $ 68,047 $ 672,767 $ 560,635
Net intersegment
interest income
(expense)........ 8,677 23,301 -- -- 43,415 63,774
----------- ------------ ----------- ----------- ----------- -----------
Net interest
income........... 71,027 48,124 123,318 68,047 716,182 624,409
----------- ------------ ----------- ----------- ----------- -----------
Provision for
loan and lease
losses........... 33 30 15,799 12,015 91,305 61,588
Noninterest
income from
external
customers........ 8,939 (174,183) 61,411 28,860 356,275 78,253
Intersegment
noninterest
income........... -- -- -- -- 67,110 30,560
Noninterest
expense.......... 1,890 1,704 26,630 23,947 413,406 365,405
Intersegment
noninterest
expense.......... 487 139 2,926 2,234 145,527 94,975
----------- ------------ ----------- ----------- ----------- -----------
Income before
income taxes..... 77,556 (127,932) 139,374 58,711 489,329 211,254
Provision for
income taxes.... 19,299 (43,106) 57,465 17,898 159,274 78,446
----------- ------------ ----------- ----------- ----------- -----------
Net income....... $ 58,257 $ (84,826) $ 81,909 $ 40,813 $ 330,055 $ 132,808
=========== ============ =========== =========== =========== ===========
Identifiable
segment assets... $19,902,048 $14,775,241 $ 4,495,500 $ 3,193,114 $72,257,846 $64,577,374
=========== ============ =========== =========== =========== ===========
----
(1) Financial data from segments below the quantitative thresholds requiring
disclosure are attributable to nonbank consumer finance operations,
factoring, commercial lawn care equipment financing, leasing and other
smaller subsidiaries.
12
BB&T Corporation
Reportable Segments
For the Nine Months Ended September 30, 2001 and 2000
Investment
Banking and
Banking Network Mortgage Banking Trust Services Agency Insurance Brokerage
----------------------- ---------------------- ------------------ ---------------- -----------------
2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
----------- ----------- ---------- ---------- -------- -------- -------- ------- -------- --------
(Dollars in thousands)
Net interest
income (expense)
from external
customers....... $ 1,096,904 $ 1,236,031 $ 455,742 $ 342,170 $(28,022) $(29,406) $ 507 $ -- $ 6,774 $ 8,840
Net intersegment
interest income
(expense)....... 450,290 335,688 (344,234) (262,796) 37,270 39,685 -- -- -- --
----------- ----------- ---------- ---------- -------- -------- -------- ------- -------- --------
Net interest
income.......... 1,547,194 1,571,719 111,508 79,374 9,248 10,279 507 -- 6,774 8,840
----------- ----------- ---------- ---------- -------- -------- -------- ------- -------- --------
Provision for
loan and lease
losses.......... 168,892 117,317 2,353 2,137 -- -- -- -- -- --
Noninterest
income from
external
customers ...... 388,468 332,630 94,542 54,605 72,274 49,712 126,762 84,399 135,158 122,979
Intersegment
noninterest
income.......... 160,687 86,884 -- -- -- -- -- -- -- --
Noninterest
expense......... 819,444 831,862 55,449 35,031 43,772 32,970 93,046 59,422 135,947 123,618
Intersegment
noninterest
expense......... 377,046 240,109 19,546 16,078 2,338 2,736 3,175 3,076 1,194 1,125
----------- ----------- ---------- ---------- -------- -------- -------- ------- -------- --------
Income before
income taxes.... 730,967 801,945 128,702 80,733 35,412 24,285 31,048 21,901 4,791 7,076
Provision for
income taxes.... 209,421 264,943 37,784 25,276 9,695 8,074 12,294 8,636 3,228 4,052
----------- ----------- ---------- ---------- -------- -------- -------- ------- -------- --------
Net income...... $ 521,546 $ 537,002 $ 90,918 $ 55,457 $ 25,717 $ 16,211 $ 18,754 $13,265 $ 1,563 $ 3,024
=========== =========== ========== ========== ======== ======== ======== ======= ======== ========
Identifiable
segment assets.. $37,915,025 $39,210,775 $9,029,370 $6,424,395 $ 48,530 $ 32,737 $125,129 $87,455 $742,244 $853,657
=========== =========== ========== ========== ======== ======== ======== ======= ======== ========
Treasury All Other Segments (1) Total Segments
------------------------ ----------------------- -----------------------
2001 2000 2001 2000 2001 2000
----------- ------------ ----------- ----------- ----------- -----------
Net interest
income (expense)
from external
customers....... $ 143,137 $ 70,761 $ 264,864 $ 196,081 $ 1,939,906 $ 1,824,477
Net intersegment
interest income
(expense)....... 30,515 56,987 -- -- 173,841 169,564
----------- ------------ ----------- ----------- ----------- -----------
Net interest
income.......... 173,652 127,748 264,864 196,081 2,113,747 1,994,041
----------- ------------ ----------- ----------- ----------- -----------
Provision for
loan and lease
losses.......... 100 91 44,805 31,497 216,150 151,042
Noninterest
income from
external
customers ...... 24,669 (160,952) 124,915 90,646 966,788 574,019
Intersegment
noninterest
income.......... -- -- -- -- 160,687 86,884
Noninterest
expense......... 5,443 4,292 77,407 65,653 1,230,508 1,152,848
Intersegment
noninterest
expense......... 1,459 415 8,626 6,690 413,384 270,229
----------- ------------ ----------- ----------- ----------- -----------
Income before
income taxes.... 191,319 (38,002) 258,941 182,887 1,381,180 1,080,825
Provision for
income taxes.... 46,690 (22,807) 72,175 54,471 391,287 342,645
----------- ------------ ----------- ----------- ----------- -----------
Net income...... $ 144,629 $ (15,195) $ 186,766 $ 128,416 $ 989,893 $ 738,180
=========== ============ =========== =========== =========== ===========
Identifiable
segment assets.. $19,902,048 $14,775,241 $ 4,495,500 $ 3,193,114 $72,257,846 $64,577,374
=========== ============ =========== =========== =========== ===========
----
(1) Financial data from segments below the quantitative thresholds requiring
disclosure are attributable to nonbank consumer finance operations,
factoring, commercial lawn care equipment financing, leasing and other
smaller subsidiaries.
13
The following table presents a reconciliation of total segment results to
consolidated results:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ ----------------------
2001 2000 2001 2000
----------- ----------- ---------- ----------
Net Interest Income
Net interest income from
segments................... $ 716,182 $ 624,409 $2,113,747 $1,994,041
Other net interest income
(1)........................ 35,141 25,322 104,861 80,845
Elimination of net
intersegment interest
income (2)................. (129,012) (63,634) (416,274) (334,806)
----------- ----------- ---------- ----------
Consolidated net interest
income.................... $ 622,311 $ 586,097 $1,802,334 $1,740,080
=========== =========== ========== ==========
Net income
Net income from segments.... $ 330,055 $ 132,808 $ 989,893 $ 738,180
Other net income (loss)
(1)........................ 177,460 (44,087) 510,589 (30,250)
Elimination of intersegment
net income (2)............. (285,549) (16,247) (804,787) (241,164)
----------- ----------- ---------- ----------
Consolidated net income.... $ 221,966 $ 72,474 $ 695,695 $ 466,766
=========== =========== ========== ==========
September September
30, 30,
2001 2000
----------- -----------
Total Assets
Total assets from segments.. $72,257,846 $64,577,374
Other assets (1)............ 12,715,051 3,369,176
Elimination of intersegment
assets (2)................. (14,663,851) (4,137,867)
----------- -----------
Consolidated total assets.. $70,309,046 $63,808,683
=========== ===========
--------
(1) Other net interest income, other net income (loss) and other assets
include amounts associated with BB&T's support functions not allocated to
the various reportable segments.
(2) BB&T's reconciliation of total segment results to consolidated results
requires the elimination of internal management accounting practices.
These adjustments include the elimination of funds transfer pricing
credits and charges and the elimination of intersegment noninterest income
and noninterest expense, which are allocated to the various segments using
BB&T's internal accounting methods.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
ANALYSIS OF FINANCIAL CONDITION
BB&T's total assets at September 30, 2001, were $70.3 billion, a $3.8
billion, or 5.6%, increase from December 31, 2000. The asset category that
produced the majority of the increase was loans and leases, including loans
held for sale, which grew $2.3 billion, or 5.2%. Additionally, securities
available for sale increased $1.4 billion, or 9.5%, from December 31, 2000.
Total deposits at September 30, 2001, increased $1.3 billion, or 3.0%, from
December 31, 2000. Short-term borrowed funds declined $1.4 billion, or 19.0%,
while long-term debt increased $2.8 billion, or 31.9%, during the first nine
months of 2001. Total shareholders' equity increased $550.0 million, or 10.1%,
during the same time frame.
The factors causing the fluctuations in the major balance sheet categories
are further discussed in the following sections.
14
Loans and Leases
BB&T had strong loan growth during the third quarter and first nine months
of 2001 compared to the previous year. Average total loans for the quarter
ended September 30, 2001, increased 11.2% compared to the same period of 2000.
Average total loans for the nine months ended September 30 were $46.3 billion,
or 11.8% greater than the average for the first nine months of 2000.
Management continues to emphasize commercial and consumer lending in order
to improve the overall profitability of the loan portfolio. As a result, BB&T
has become the leading small business lender in the Carolinas. BB&T has
historically been a frequent acquirer of community banks and thrift
institutions, which has resulted in a significant percentage of the
consolidated loan portfolio being comprised of mortgage loans and has
positioned BB&T as the largest originator of mortgage loans in the Carolinas,
with third quarter 2001 originations totaling $2.6 billion. On a relative
basis, mortgage loans are less profitable than commercial or consumer loans.
For this reason, BB&T sells most of its fixed-rate mortgage loans in the
secondary market or securitizes the loans in order to improve the profitability
of the overall loan portfolio. However, due to the low interest rate
environment and resulting high volumes of mortgage loan originations and the
inventory of mortgage loans held for sale, the mix of the consolidated loan
portfolio through September, 2001, was very similar to that of one year ago.
Average mortgage loans increased 12.9% during the first nine months of 2001
compared to the same period of 2000 and represented 20.2% of average loans and
leases at September 30, 2001, compared to 20.0% a year ago. Average commercial
loans, including lease receivables, increased 14.0% during the first nine
months of 2001, and now compose 53.8% of the loan portfolio compared to 52.8%
for the first nine months of 2000. Average consumer loans, which include sales
finance, revolving credit and direct retail, increased 6.7% for the nine months
ended September 30, 2001, compared to the same period in 2000 and compose the
remaining 25.9% of average loans, as compared to 27.2% for the same period in
2000.
The growth trends in the loan portfolio described above are also evident in
the third quarter of 2001. For the third quarter of 2001, average loans totaled
$47.2 billion, an increase of $4.8 billion, or 11.2%, compared to the third
quarter of 2000. Average commercial loans and leases increased $2.9 billion, or
13.0%, in the third quarter of 2001 to a total of $25.4 billion, compared to
the third quarter of 2000; average consumer loans increased $646.4 million, or
5.6%, in the third quarter of 2001 to a total of $12.1 billion, compared to the
third quarter of 2000; and average mortgage loans increased $1.2 billion, or
14.2%, in the third quarter of 2001 to a total of $9.7 billion, compared to the
third quarter of 2000.
The growth rates of the average loans described above are affected by
securitization programs and by loan portfolios held by companies that were
acquired in purchase transactions during the last three months of 2000 and the
first nine months of 2001. Also, BB&T securitized $984.5 million of mortgage
loans during 2000 and $251.3 million thus far in 2001, which reduced reported
growth in average mortgage loans. During the first nine months of 2001, loans
totaling $502.3 million and $451.9 million were acquired through the purchases
of FirstSpartan Financial Corp. ("FirstSpartan") and Virginia Capital
Bancshares, Inc. ("VCAP"), respectively. Excluding the effect of purchase
accounting transactions completed during 2000 and 2001 and mortgage loan
securitizations, average "internal" loan growth for the three months ended
September 30, 2001, was 8.9% compared to the third quarter of 2000. By
category, excluding the effects of purchase accounting transactions and loan
securitizations, average mortgage loans, including loans held for sale,
increased 13.1%, average commercial loans and leases grew 9.9%, and average
consumer loans increased 3.3% in the third quarter of 2001 compared to the same
period of 2000.
The annualized fully taxable equivalent ("FTE") yields on commercial,
consumer and mortgage loans for the first nine months of 2001 were 8.47%,
9.81%, and 7.75%, respectively, resulting in an annualized yield on the total
loan portfolio of 8.67%. This reflects a decrease of 62 basis points from the
9.29% annualized yield on average loans during the first nine months of 2000.
The decrease in yield resulted from a lower average prime rate during 2001, as
well as a lower interest rate environment resulting from aggressive action from
the Federal Reserve Board. Through September 30, 2001, the Federal Reserve
reduced the target Federal funds rate eight
15
times for a total of 3.50%. During the third quarter, the Federal Reserve
reduced the target Federal funds on two occasions by a total of .75%. As a
result of the Federal Reserve Board's actions, the average prime rate, which is
the basis for pricing many commercial and consumer loans, declined to 6.57%
during the three months ended September 30, 2001, compared to 9.50% for the
comparable period of 2000. For the first nine months of 2001, the prime rate
averaged 7.51%, compared to 9.14% during the first nine months of 2000. The
growth in the overall loan portfolio, combined with the decrease in the yield
of the portfolio, from 9.45% in the third quarter and 9.29% in the first nine
months of 2000 to 8.23% in the third quarter and 8.67% in the first nine months
of 2001, resulted in a decrease of 4.6% in interest income from loans and
leases in the current quarter and an increase of 2.3% in interest income from
loans and leases during the first nine months of 2001 compared to the 2000
periods.
BB&T's loan growth has slowed from the second quarter to the third quarter
of 2001 as a result of the current economic environment. Average loans for the
quarter ended September 30, 2001, increased 6.6%, on an annualized basis,
compared to the quarter ended June 30, 2001. Average commercial loans and
leases increased $443.8 million, or 7.1% annualized, in the third quarter of
2001 compared to the second quarter of 2001; average consumer loans increased
$169.6 million, or 5.6% annualized, in the third quarter of 2001 compared to
the second quarter of 2001; and average mortgage loans increased $159.6
million, or 6.7% annualized, in the third quarter of 2001 compared to the
second quarter of 2001.
Securities
Securities available for sale totaled $16.7 billion at September 30, 2001,
an increase of $1.4 billion, or 9.5%, from December 31, 2000. Securities
available for sale had net unrealized gains, net of deferred income taxes, of
$408.0 million at September 30, 2001, compared to net unrealized gains, net of
deferred income taxes, of $104.3 million at December 31, 2000. Securities held
to maturity totaled $38.4 million, down $583.7 million, or 93.8%, from year-end
2000. This decline reflects the reclassification of most of the held to
maturity category to available for sale. In conjunction with mergers and
acquisitions, BB&T transferred $533.5 million from the held to maturity
category to the available for sale category and, as permitted under a one time
window available in conjunction with the adoption of SFAS No. 133, BB&T
transferred $53.7 million from the held to maturity category to the available
for sale category. Trading securities totaled $116.5 million, an increase of
$19.8 million, or 20.5%, compared to the balance at December 31, 2000.
Average total securities for the first nine months amounted to $15.8
billion, up 4.0% from the average during the first nine months of 2000. For the
third quarter of 2001, average securities totaled $16.0 billion, or 4.4% higher
than the average balance for the third quarter of 2000.
As a result of a restructuring of the securities portfolio in the second and
third quarters of 2000, the mix of the investment portfolio has changed
significantly during 2001 compared to 2000 to include a greater percentage of
U.S. Government agency securities. The restructuring was undertaken in order to
improve the overall yield and liquidity of the portfolio and reduce the average
duration of the portfolio. As part of the restructuring, BB&T sold $5.9 billion
in securities and reinvested the proceeds in higher yielding securities,
primarily U.S. Government securities. At September 30, 2001, average U.S.
Government securities composed 73.5% of the total portfolio compared to 64.8%
in 2000. Mortgage-backed securities composed 19.0% at September 30, 2001, and
state and municipal securities made up 6.8%, compared to 27.2% and 7.3%,
respectively, in 2000.
The annualized FTE yield on the average total securities portfolio for the
first nine months of 2001 was 7.13%, an increase of 30 basis points from the
yield earned in the first nine months of 2000. This increase resulted primarily
from the above described restructuring of the securities portfolio during 2000.
Other Interest Earning Assets
Federal funds sold and securities purchased under resale agreements or
similar arrangements totaled $264.5 million at September 30, 2001, a decrease
of $65.2 million, or 19.8%, compared to December 31, 2000.
16
Interest-bearing deposits with banks increased $44.7 million from December 31,
2000. These categories of earning assets are subject to large daily
fluctuations based on the availability of these types of funds. The average
yield on other interest-earning assets for the first nine months of 2001 was
4.34%, a decrease from the 6.47% earned during the first nine months of 2000.
The decrease in the yield on other interest-earning assets is principally the
result of the decrease in the average Federal funds rate from 6.16% for the
first nine months of 2000 to 4.47% for the first nine months of 2001.
Other Assets
BB&T's other noninterest-earning assets, excluding premises and equipment
and noninterest-bearing cash and due from banks, increased $684.4 million from
December 31, 2000, to September 30, 2001. The increase results primarily from
the purchases of additional bank-owned life insurance, which is used as a
funding source for certain post-retirement benefits, at a cost of $406.8
million. Additionally, unamortized goodwill from purchase acquisitions
increased $22.1 million and capitalized mortgage servicing rights increased
$101.5 million.
Deposits
Total end of period deposits increased $1.3 billion, or 3.0%, from December
31, 2000, to September 30, 2001. Average deposits for the first nine months of
2001 increased $3.0 billion, or 7.2%, compared to the first nine months of
2000. The categories of deposits with the highest average rates of growth in
2001 compared to 2000 were: certificates of deposit and other time deposits,
which grew $1.3 billion, or 6.3%, and money rate savings accounts, including
investor deposit accounts, which increased $2.1 billion, or 20.0%. The growth
realized in these deposit categories was partially offset by a decline of
$581.9 million, or 14.5%, in average savings and interest checking.
For the third quarter, average deposits increased $2.6 billion, or 6.2%.
Total transaction accounts, which include noninterest-bearing deposits,
savings, interest checking and money rate savings, totaled $22.4 billion for
the third quarter, an increase of $2.2 billion, or 10.8%, compared to the third
quarter of 2000. Average time deposits for the third quarter totaled $22.2
billion, an increase of $432.6 million, or 2.0%, compared to the third quarter
of 2000.
The growth in average deposits for 2001 includes the effect of deposits
acquired in purchase accounting transactions completed during the last three
months of 2000 and the first nine months of 2001. The purchase of FirstSpartan
and VCAP resulted in the addition of $436.1 million and $381.6 million in
deposits, respectively. Growth rates for noninterest-bearing deposits are also
affected by an official check outsourcing program, which has improved fee
income, but reduced the balance of noninterest-bearing deposits. Excluding the
effects of purchase accounting transactions and official check outsourcing,
average deposits for the nine months ended September 30, 2001, would have
increased 4.8% compared to the same time period one year ago. Excluding the
effects of purchase accounting, transaction account deposits increased 6.5%
compared to the nine months ended September 30, 2000. Certificate accounts and
other time deposits would have increased 3.1%, if purchase accounting
transactions were excluded. For the third quarter, total average deposits,
excluding the effects of purchase accounting transactions and official check
outsourcing, increased 3.0% compared to the third quarter of 2000.
The annualized average rate paid on total interest-bearing deposits during
the first nine months of 2001 was 4.41%, a decrease of 24 basis points compared
to 2000.
Other Borrowings
The growth in loans, securities and other assets in recent years have
exceeded the growth of total deposits. As a result, cost-effective alternative
funding sources, such as Federal Home Loan Bank ("FHLB") advances, master
notes, purchases of Federal funds and sales of securities under repurchase
agreements have been increasingly utilized to support balance sheet growth.
17
At September 30, 2001, short-term borrowed funds totaled $5.9 billion, a
decrease of $1.4 billion, or 19.0%, compared to December 31, 2000. For the
third quarter of 2001, average short-term borrowed funds totaled $6.4 billion,
an increase of $313.0 million, or 5.1%, from the comparable period of 2000. For
the nine months ended September 30, 2001, average short-term borrowed funds
totaled $6.2 billion, a decrease of $740.5 million, or 10.6%, compared to the
nine months of 2000. The average annualized rate paid on short-term borrowed
funds was 3.43% for the third quarter of 2001, a decrease of 279 basis points
from the average rate of 6.22% paid in the third quarter of 2000. This decrease
in the cost of short-term borrowed funds resulted from the lower interest rate
environment that has existed during 2001 compared to 2000, which included a 302
basis point decrease in the average Federal funds rate from the third quarter
of 2000 to the third quarter of 2001.
Long-term debt consists primarily of FHLB advances, medium term bank notes
and corporate subordinated debt. These borrowings provide BB&T with the
flexibility to structure borrowings in a manner that aids in the management of
interest rate risk and liquidity. Long-term debt totaled $11.4 billion at
September 30, 2001, an increase of $2.8 billion, or 31.9%, from the balance at
December 31, 2000. For the third quarter of 2001, average long-term debt
totaled $11.1 billion, an increase of $2.6 billion, or 30.2%, compared to the
third quarter of 2000. For the nine months ended September 30, 2001, total
average long-term borrowed funds totaled $10.8 billion, an increase of $3.5
billion, or 47.8%, compared to the first nine months of 2000. Long-term debt
has been utilized for a variety of funding needs, including the repurchase of
common stock in conjunction with certain acquisitions. The substantial increase
in long-term borrowings during the year reflects BB&T's efforts to take
advantage of declining interest rates and lower funding costs for a longer
period of time. The average annualized rate paid on long-term borrowed funds
was 5.50% for the third quarter of 2001, a decrease of 68 basis points from the
average rate of 6.18% paid in the third quarter of 2000.
Asset Quality
Nonperforming assets, composed of foreclosed real estate, repossessions,
nonaccrual loans and restructured loans, totaled $318.9 million at September
30, 2001, compared to $236.3 million at December 31, 2000. Nonperforming
assets, as a percentage of loan-related assets, were .68% at September 30,
2001, compared to .53% at December 31, 2000. Loans 90 days or more past due and
still accruing interest totaled $94.0 million at September 30, 2001, compared
to $81.6 million at year-end 2000.
BB&T's net charge-offs totaled $44.1 million for the third quarter and
amounted to .37% of average loans and leases, on an annualized basis, compared
to $23.6 million, or .22% of average loans and leases, on an annualized basis,
in the corresponding period in 2000. For the nine months ended September 30,
2001, net charge-offs totaled $122.9 million, or .35% of average loans and
leases, compared to $70.4 million, or .23% of average loans and leases, in
2000.
While the slowdown in the economy has resulted in increases in nonperforming
assets and net charge-offs during the third quarter, BB&T's lending strategy,
which includes relationship-based lending within our markets and smaller
individual loan balances, produces superior credit quality in good and bad
economic times. BB&T's asset quality, as measured by relative levels of
nonperforming assets and net charge-offs, has remained approximately half that
of published industry averages.
The allowance for loan and lease losses was $634.6 million, or 1.35% of
loans and leases, at September 30, 2001, compared to $578.1 million, or 1.29%
of loans and leases, at December 31, 2000. The increase in the allowance as a
percentage of loans and leases reflects higher provisions for loan and lease
losses in view of the economic slowdown and the impact of acquiring
institutions with higher allowance to loan ratios.
The provision for loan and lease losses for the third quarter of 2001 was
$68.5 million, compared to $40.7 million in the comparable quarter of 2000. For
the nine months, the provision for loan and lease losses totaled $159.3 million
compared to $99.2 million in 2000. The increased provision during 2001 was
necessary
18
to cover higher net charge-offs, maintain the allowance at a level considered
adequate to absorb losses inherent in the loan portfolio at the balance sheet
date and to provide additional allowances for acquired entities to align their
collection, credit evaluation and charge-off policies and procedures with those
of BB&T.
Asset quality statistics for the last five calendar quarters are presented
in the accompanying table.
ASSET QUALITY ANALYSIS
(Dollars in thousands)
For the Three Months Ended
-------------------------------------------------
9/30/01 6/30/01 3/31/01 12/31/00 9/30/00
--------- -------- -------- -------- --------
Allowance For Loan & Lease
Losses
Beginning balance......... $ 610,171 $601,788 $578,107 $559,455 $542,305
Allowance for acquired
loans.................... -- 9,470 10,566 12,934 --
Provision for loan and
lease losses............. 68,500 48,798 42,020 47,958 40,714
Net charge-offs........... (44,119) (49,885) (28,905) (42,240) (23,564)
--------- -------- -------- -------- --------
Ending balance........... $ 634,552 $610,171 $601,788 $578,107 $559,455
========= ======== ======== ======== ========
Risk Assets
Nonaccrual loans and
leases................... $ 266,384 $244,711 $203,710 $180,638 $150,046
Foreclosed real estate.... 34,601 27,725 41,132 37,966 32,403
Other foreclosed
property................. 17,733 20,494 22,946 17,233 16,347
Restructured loans........ 183 521 2,574 492 445
--------- -------- -------- -------- --------
Total nonperforming
assets.................. $ 318,901 $293,451 $270,362 $236,329 $199,241
--------- -------- -------- -------- --------
Loans 90 days or more past
due and still accruing.... $ 93,968 $ 84,399 $ 83,001 $ 81,629 $ 84,220
========= ======== ======== ======== ========
Asset Quality Ratios
Nonaccrual loans and leases
as a percentage of total
loans and leases*......... .57% .52% .45% .40% .35%
Total nonperforming assets
as a percentage of:
Total assets.............. .45 .43 .40 .36 .31
Loans and leases plus
foreclosed property*..... .68 .62 .58 .53 .46
Annualized net charge-offs
as a percentage of average
loans and leases*......... .37 .43 .26 .39 .22
Allowance for loan and
lease losses as a
percentage of loans and
leases*................... 1.35 1.30 1.30 1.29 1.30
Ratio of allowance for loan
and lease losses to:
Net charge-offs 3.63x 3.05x 5.13x 3.44x 5.97x
Nonaccrual and
restructured loans and
leases................... 2.38 2.49 2.92 3.19 3.72
--------
* All items referring to loans and leases include loans held for sale and are
net of unearned income.
MARKET RISK MANAGEMENT
As a financial institution, BB&T's most significant market risk exposure is
interest rate risk. The primary objective of interest rate risk management is
to minimize the effect that changes in interest rates have on net interest
income. This is accomplished through active management of asset and liability
portfolios with a focus on the strategic pricing of asset and liability
accounts and management of maturity mixes for assets and liabilities. The goal
of these activities is the development of appropriate maturity and repricing
opportunities in BB&T's portfolios of assets and liabilities that will produce
consistent net interest income during periods of changing interest rates.
BB&T's Asset / Liability Management Committee ("ALCO") monitors loan,
investment and liability portfolios to ensure comprehensive management of
interest rate risk.
19
The asset/liability management process is designed to achieve relatively
stable net interest margins and assure liquidity by coordinating the volumes,
maturities or repricing opportunities of earning assets, deposits and borrowed
funds. It is the responsibility of the ALCO to determine and achieve the most
appropriate volume and mix of earning assets and interest-bearing liabilities,
as well as ensure an adequate level of liquidity and capital, within the
context of corporate performance goals. The ALCO also sets policy guidelines
and establishes long-term strategies with respect to interest rate risk
exposure and liquidity. The ALCO meets regularly to review BB&T's interest rate
risk and liquidity positions in relation to present and prospective market and
business conditions, and adopts funding and balance sheet management strategies
that are intended to ensure that the potential impact on earnings and liquidity
as a result of fluctuations in interest rates is within acceptable standards.
The majority of assets and liabilities of financial institutions are
monetary in nature and differ greatly from most commercial and industrial
companies that have significant investments in fixed assets and inventories.
Fluctuations in interest rates and actions of the Board of Governors of the
Federal Reserve System ("FRB") to regulate the availability and cost of credit
have a greater effect on a financial institution's profitability than do the
effects of higher costs for goods and services. Through its balance sheet
management function, BB&T is positioned to respond to changing interest rates
and inflationary trends.
Management uses Interest Sensitivity Simulation Analysis ("Simulation") to
measure the sensitivity of projected earnings to changes in interest rates.
Simulation takes into account the current contractual agreements that BB&T has
with its customers on deposits, borrowings, loans, investments and any
commitments to enter into those transactions. Management monitors BB&T's
interest sensitivity by means of a computer model that incorporates the current
volumes, average rates and scheduled maturities and payments of asset and
liability portfolios, together with multiple scenarios of projected
prepayments, repricing opportunities and anticipated volume growth. Using this
information, the model projects earnings based on projected portfolio balances
under multiple interest rate scenarios. This level of detail is needed to
simulate the effect that changes in interest rates and portfolio balances may
have on the earnings of BB&T. This method is subject to the accuracy of the
assumptions that underlie the process, however, it provides a better
illustration of the sensitivity of earnings to changes in interest rates than
other analyses such as static or dynamic gap.
The asset/liability management process requires a number of key assumptions.
Management determines the most likely outlook for the economy and interest
rates by analyzing external factors, including published economic projections
and data, the effects of likely monetary and fiscal policies as well as any
enacted or prospective regulatory changes. BB&T's current and prospective
liquidity position, current balance sheet volumes and projected growth,
accessibility of funds for short-term needs and capital maintenance are also
considered. This data is combined with various interest rate scenarios to
provide management with information necessary to analyze interest sensitivity
and to aid in the development of strategies to reach performance goals.
20
The following table shows the effect that the indicated changes in interest
rates would have on net interest income as projected for the next twelve months
under the "most likely" interest rate scenario incorporated into the Interest
Sensitivity Simulation computer model. Key assumptions in the preparation of
the table include prepayment speeds of mortgage-related assets; cash flows and
maturities of derivative financial instruments, changes in market condition,
loan volumes and pricing, deposit sensitivity; customer preferences and capital
plans. The resulting change in net interest income reflects the level of
sensitivity that net interest income has in relation to changing interest
rates.
Interest Sensitivity Simulation Analysis
September 30, 2001
Interest Rate Scenario
----------------------------------------
Annualized
Hypothetical
Percentage Change
Linear Change in Net
in Prime Rate Prime Rate Interest Income
------------------- ------------------- -------------------
+3.00% 8.50% 1.98%
+1.50 7.00 1.26
-1.50 4.00 -2.71
-3.00 2.50 -4.90
Management has established parameters for asset/liability management which
prescribe a maximum impact on net interest income of 3% for a 150 basis point
parallel change in interest rates over six months from the most likely interest
rate scenario, and a maximum of 6% for a 300 basis point change over 12 months.
It is management's ongoing objective to effectively manage the impact of
changes in interest rates and minimize the resulting effect on earnings as
evidenced by the preceding table. At September 30, 2001, the sensitivity of
BB&T's net interest income to changes in interest rates was within the
guidelines established by management, as illustrated in the accompanying table.
Derivative Financial Instruments
BB&T utilizes a variety of financial instruments to aid in the management of
interest rate risk. These instruments, commonly referred to as derivatives,
primarily consist of interest rate swaps, caps, floors, collars, financial
forward and futures contracts and options written and purchased. A derivative
is a financial instrument that derives its cash flows, and therefore its value,
by reference to an underlying instrument, index or referenced interest rate.
BB&T uses derivatives primarily to hedge business loans, forecasted sales of
mortgage loans and certificates of deposit.
Credit risk related to derivatives arises when amounts receivable from a
counterparty exceed those payable. The risk of loss with any counterparty is
limited to a small fraction of the notional amount. BB&T deals only with
national market makers with strong credit ratings in its derivatives
activities. BB&T further controls the risk of loss by subjecting counterparties
to credit reviews and approvals similar to those used in making loans and other
extensions of credit. All of the derivative contracts to which BB&T is a party
settle monthly, quarterly or semiannually. Further, BB&T has netting agreements
with the dealers with which it does business. Because of these factors, BB&T's
credit risk exposure at September 30, 2001, was not material.
Derivative contracts are written in amounts referred to as notional amounts.
Notional amounts only provide the basis for calculating payments between
counterparties and do not represent amounts to be exchanged between parties or
a measure of financial risk. On September 30, 2001, BB&T had derivative
financial instruments outstanding with notional amounts totaling $3.8 billion.
The estimated fair value of open contracts reflected net unrealized losses of
$2.4 million at September 30, 2001.
BB&T classifies its derivative financial instruments as either (1) a hedge
of an exposure to changes in the fair value of a recorded asset or liability
("fair value hedge"), (2) a hedge of an exposure to changes in the cash flows
of a recognized asset, liability or forecasted transaction ("cash flow hedge"),
(3) a hedge of a
21
foreign currency exposure ("foreign currency hedge"), of which BB&T has none,
or (4) derivatives not designated as hedges. For a qualifying fair value hedge,
changes in the value of the derivatives that have been highly effective as
hedges are recognized in current period earnings along with the corresponding
changes in the value of the designated hedged item attributable to the risk
being hedged. For a qualifying cash flow hedge, the effective portion of
changes in the value of the derivatives that have been highly effective are
recognized in other comprehensive income until the related cash flows from the
hedged item are recognized in earnings. For either fair value hedges or cash
flow hedges, net income may be affected to the extent that changes in the value
of the derivative instruments do not perfectly offset changes in the value of
the hedged items. During the first nine months of 2001, there was no impact on
net income resulting from hedge ineffectiveness.
As of September 30, 2001, BB&T had recorded unrecognized losses on cash flow
hedges of $21.9 million. Substantially all of this amount is attributable to
forward commitments and options hedging the cash flows from forecasted sales of
mortgage loans. The ultimate sale of the related loans will result in
reclassification of these unrecognized amounts into earnings. If the cash flow
hedge is discontinued because the forecasted transactions do not occur, these
amounts will be immediately reclassified into earnings. BB&T expects to
reclassify substantially all of the losses into earnings within the next 12
months.
BB&T has a notional amount of $1.8 billion of derivatives that do not meet
the requirements for hedge accounting treatment under SFAS No. 133.
Accordingly, these derivatives have been recorded at fair value in accordance
with the statement. The related net gains or losses for these derivatives,
which were not material to earnings for the first nine months of 2001, are
recorded in current period earnings as other noninterest income.
The following table sets forth certain information concerning BB&T's
derivative financial instruments at September 30, 2001:
Derivative Financial Instruments
September 30, 2001
(Dollars in thousands)
Notional Average Average Estimated
Amount Receive Rate Pay Rate Fair Value
Type ---------- ------------ -------- ----------
Receive fixed swaps............... $ 743,796 5.85% 3.64% $35,407
Pay fixed swaps................... 83,929 3.62 4.83 (2,649)
Caps, floors & collars............ 72,550 -- -- --
Foreign exchange contracts........ 246,498 -- -- 855
Forward contracts on mortage
loans............................ 1,970,900 -- -- (35,660)
Mortgage loan commitments......... 559,772 -- -- (6)
Options on mortgage lending
commitments...................... 75,000 -- -- (354)
---------- -------
Total............................. $3,752,445 $(2,407)
========== =======
CAPITAL ADEQUACY AND RESOURCES
The maintenance of appropriate levels of capital is a management priority
and is monitored on an ongoing basis. BB&T's principal goals related to capital
are to provide an adequate return to shareholders while retaining a sufficient
base to support future growth and comply with all regulatory standards.
Total shareholders' equity was $6.0 billion at September 30, 2001, and $5.4
billion at December 31, 2000. BB&T's book value per common share at September
30, 2001, was $13.18 compared to $11.96 at December 31, 2000.
Financial holding companies and their subsidiaries are subject to regulatory
requirements with respect to risk-based capital adequacy. Risk-based capital
ratios measure capital as a percentage of balance sheet risk. The risk-weighted
values of balance sheet items are determined in accordance with risk factors
specified by Federal regulatory pronouncements.
22
Tier 1 capital (total shareholders' equity excluding unrealized gains or
losses on debt securities available for sale and unrealized gains or losses on
cash flow hedges, net of tax effects, plus certain mandatorily redeemable
capital securities, less nonqualifying intangible assets) is required to be at
least 4% of risk-weighted assets, and total capital (Tier 1 capital, a
qualifying portion of the allowance for loan and lease losses and qualifying
subordinated debt) must be at least 8% of risk-weighted assets, with one half
of the minimum consisting of Tier 1 capital.
In addition to the risk-based capital measures described above, regulators
have also established minimum leverage capital requirements for banking
organizations. This is the primary measure of capital adequacy used by BB&T's
management, and is calculated by dividing period-end Tier 1 capital by average
tangible assets for the most recent quarter. The minimum required Tier 1
leverage ratio ranges from 3% to 5% depending upon Federal bank regulatory
agency evaluation of an organization's overall safety and soundness.
BB&T's capital ratios at the end of the last five quarters are presented in
the accompanying table:
CAPITAL RATIOS
2001 2000
----------------------- ---------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
Risk-based capital ratios:
Tier 1 capital....................... 9.6% 9.7% 9.6% 9.7% 9.8%
Total capital........................ 13.2 12.0 12.1 12.2 12.4
Tier 1 leverage ratio.................. 7.1 7.2 7.0 7.3 7.1
ANALYSIS OF RESULTS OF OPERATIONS
Net income for the third quarter of 2001 totaled $222.0 million, an increase
of 206.3% compared to the $72.5 million earned during the comparable quarter of
2000. On a diluted per share basis, earnings for the three months ended
September 30, 2001, were $.48, compared to $.16 for the same period in 2000, an
increase of 200.0%. BB&T's operating results for the third quarter of 2001
produced an annualized return on average assets of 1.27% and an annualized
return on average shareholders' equity of 14.92% compared to prior year ratios
of .46% and 5.73%, respectively.
Net income for the nine months ended September 30, 2001, totaled $695.7
million, an increase of $228.9 million, or 49.0%, compared to the $466.8
million earned during the comparable period of 2000. On a diluted per share
basis, earnings for the nine months ended September 30, 2001, were $1.51
compared to $1.02 for the same period in 2000, an increase of 48.0%. BB&T's
operating results for the first nine months of 2001 produced an annualized
return on average assets of 1.36% and an annualized return on average
shareholders' equity of 16.36% compared to prior year ratios of 1.02% and
12.84%, respectively.
BB&T incurred significant nonrecurring items related principally to the
consummation of mergers and acquisitions during both 2001 and 2000, and
nonrecurring losses related to a restructuring of the investment securities
portfolio during 2000, which significantly affected net income during both
years. For the third quarter of 2001, BB&T recorded $61.5 million in net after-
tax nonrecurring charges primarily associated with the merger of F&M National
Corporation of Winchester, Virginia, and systems conversion costs related to
other mergers. During the third quarter of 2000, BB&T incurred $175.7 million
in after-tax nonrecurring charges primarily associated with the acquisition of
One Valley Bancorp of Charleston, West Virginia, and systems conversion costs
related to other mergers, as well as losses incurred in restructuring the
investment securities portfolio. Merger-related charges typically include, but
are not limited to, personnel-related expenses such as staff relocation, early
retirement packages and contract settlements; occupancy, furniture and
equipment expenses including branch consolidation; and other costs, such as
operational charge-offs, professional fees, etc.
23
Excluding the effect of the above-described nonrecurring items on 2001 and
2000 operating results, BB&T's net income for the third quarter of 2001 would
have totaled $283.5 million, an increase of 14.2% over the $248.2 million that
would have been earned during the third quarter of 2000. On a diluted per share
basis, earnings for the three months ended September 30, 2001, excluding
nonrecurring items, were $.62, compared to $.54 for the same period in 2000, an
increase of 14.8%. BB&T's operating results for the third quarter of 2001,
excluding the items described above, produced an annualized return on average
assets of 1.62% and an annualized return on average shareholders' equity of
19.05% compared to prior year ratios of 1.58% and 19.62%, respectively.
For the nine months ended September 30, 2001, BB&T incurred $116.7 million
in net after-tax nonrecurring charges related to the mergers with Century South
Banks, Inc., FCNB Corp. of Frederick, Maryland, and F&M National Corporation,
as well as a one-time gain from the sale of the Company's investment in an
electronic payment processing company. During the first nine months of 2000,
BB&T incurred $241.5 million in net after-tax merger-related charges associated
primarily with the 2000 acquisitions noted above and the bond portfolio
restructuring in the second and third quarters.
Excluding the effect of the nonrecurring items noted above, net income for
the nine months ended September 30, 2001 would have totaled $812.4 million, an
increase of $104.1 million, or 14.7%, compared to the $708.3 million that would
have been earned during the comparable period of 2000. On a diluted per share
basis, earnings, excluding nonrecurring items, for the nine months ended
September 30, 2001, were $1.77, compared to $1.55 for the same period in 2000,
an increase of 14.2%. BB&T's operating results for the first nine months of
2001, excluding the effect of nonrecurring items, produced an annualized return
on average assets of 1.59% and an annualized return on average shareholders'
equity of 19.11% compared to prior year ratios of 1.55% and 19.49%,
respectively.
FTE net interest income increased 8.6% during the third quarter and 7.2% for
the nine months of 2001 compared to the 2000 periods due to growth in average
earning assets, partially offset by a decline in the net yield on interest-
earning assets. Fluctuations in net interest income, noninterest income and
noninterest expenses will be further discussed in the following paragraphs.
The following table sets forth selected financial ratios for the last five
calendar quarters:
PROFITABILITY MEASURES
2001 2000
----------------------- ---------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
Return on average assets.............. 1.27% 1.40% 1.43% 1.44% 0.46%
Return on average equity.............. 14.92 16.81 17.48 18.14 5.73
Net interest margin................... 4.18 4.16 4.14 4.23 4.22
Fee income ratio (taxable
equivalent)*......................... 33.2 33.7 32.3 30.4 30.5
Efficiency ratio (taxable
equivalent)*......................... 51.4 52.0 51.7 50.7 52.2
--------
* Excludes securities gains (losses), foreclosed property expense and
nonrecurring items.
Net Interest Income and Net Interest Margin
Net interest income on an FTE basis was $667.9 million for the third quarter
of 2001 compared to $615.3 million for the same period in 2000, an increase of
$52.6 million, or 8.6%. For the three months ended September 30, 2001, average
earning assets increased $5.5 billion, or 9.4%, compared to the same period of
2000, while average interest-bearing liabilities increased by $5.2 billion, or
10.2%, and the net interest margin decreased from 4.22% in the third quarter of
2000 to 4.18% in the current quarter. The four basis point decline
24
in the net interest margin resulted primarily from increased investments in
bank owned life insurance, which add to funding costs but produce revenue that
is classified as noninterest income, and BB&T's share repurchase program, which
results in increased funding costs.
For the nine months ended September 30, 2001, FTE net income increased 7.2%.
Average interest-earning assets for the nine months ended September 30, 2001,
increased $5.5 billion, or 9.6%, while interest-bearing liabilities increased
$5.5 billion, or 11.2%, compared to the first nine months of 2000. The net
interest margin for the nine months ended September 30, 2001, was 4.16%, down
from 4.26% in the first nine months of 2000. The decrease resulted principally
from the same factors that affected the quarterly comparison described above.
The following tables set forth the major components of net interest income
and the related annualized yields and rates for the third quarter and first
nine months of 2001 compared to the same periods in 2000, and the variances
between the periods caused by changes in interest rates versus changes in
volumes.
25
Net Interest Income and Rate / Volume Analysis
For the Three Months Ended September 30, 2001 and 2000
Annualized
Yield /
Average Balances Rate Income / Expense Change due to
----------------------- ------------ --------------------- Increase -------------------
Fully Taxable Equivalent-- 2001 2000 2001 2000 2001 2000 (Decrease) Rate Volume
(Dollars in thousands) ----------- ----------- ----- ----- ---------- ---------- --------- --------- --------
Assets
Securities (1):
U.S. Treasury,
government and other
(5)..................... $14,974,349 $14,263,558 6.94% 7.14% $ 259,754 $ 254,503 $ 5,251 $ (7,245) $ 12,496
States and political
subdivisions............ 1,041,310 1,077,938 7.44 7.48 19,367 20,158 (791) (106) (685)
----------- ----------- ----- ----- ---------- ---------- -------- --------- --------
Total securities (5).... 16,015,659 15,341,496 6.86 7.16 279,121 274,661 4,460 (7,351) 11,811
Other earning assets
(2)...................... 451,010 413,661 3.10 7.07 3,522 7,348 (3,826) (4,447) 621
Loans and leases, net of
unearned income
(1)(3)(4)(5)............. 47,188,382 42,428,208 8.23 9.45 977,079 1,007,129 (30,050) (138,906) 108,856
----------- ----------- ----- ----- ---------- ---------- -------- --------- --------
Total earning assets.... 63,655,051 58,183,365 7.88 8.83 1,259,722 1,289,138 (29,416) (150,704) 121,288
----------- ----------- ----- ----- ---------- ---------- -------- --------- --------
Non-earning assets...... 5,952,129 4,374,645
----------- -----------
Total assets........... $69,607,180 $62,558,010
=========== ===========
Liabilities and
Shareholders' Equity
Interest-bearing
deposits:
Savings and interest-
checking................ $ 3,334,252 $ 3,746,810 1.38 1.84 11,560 17,283 (5,723) (3,997) (1,726)
Money rate savings...... 12,725,908 10,485,816 2.25 3.85 72,136 101,358 (29,222) (48,018) 18,796
Time deposits........... 22,238,104 21,805,459 5.33 5.97 298,526 327,211 (28,685) (35,884) 7,199
----------- ----------- ----- ----- ---------- ---------- -------- --------- --------
Total interest-bearing
deposits................ 38,298,264 36,038,085 3.96 4.92 382,222 445,852 (63,630) (87,899) 24,269
Short-term borrowed
funds.................... 6,418,925 6,105,917 3.43 6.22 55,507 95,463 (39,956) (44,776) 4,820
Long-term debt........... 11,128,696 8,546,973 5.50 6.18 154,110 132,549 21,561 (15,680) 37,241
----------- ----------- ----- ----- ---------- ---------- -------- --------- --------
Total interest-bearing
liabilities............. 55,845,885 50,690,975 4.21 5.29 591,839 673,864 (82,025) (148,355) 66,330
----------- ----------- ----- ----- ---------- ---------- -------- --------- --------
Noninterest-bearing
deposits................ 6,319,729 5,963,751
Other liabilities....... 1,538,263 871,670
Shareholders' equity.... 5,903,303 5,031,614
----------- -----------
Total liabilities and
shareholders' equity.... $69,607,180 $62,558,010
=========== ===========
Average interest rate
spread................... 3.67 3.54
Net yield on earning
assets................... 4.18% 4.22% $ 667,883 $ 615,274 $ 52,609 $ (2,349) $ 54,958
===== ===== ========== ========== ======== ========= ========
Taxable equivalent
adjustment............... $ 45,572 $ 29,177
========== ==========
----
(1) Yields related to securities, loans and leases exempt from income taxes
are stated on a taxable equivalent basis assuming tax rates in effect for
the periods presented.
(2) Includes Federal funds sold and securities purchased under resale
agreements or similar arrangements.
(3) Loan fees, which are not material for any of the periods shown, have been
included for rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances. Only the
interest collected on such loans has been included as income.
(5) Includes assets which were held for sale or available for sale at
amortized cost and trading securities at estimated fair value.
26
Net Interest Income and Rate / Volume Analysis
For the Nine Months Ended September 30, 2001 and 2000
Annualized
Yield /
Average Balances Rate Income / Expense Change due to
----------------------- ------------ --------------------- Increase -------------------
Fully Taxable Equivalent-- 2001 2000 2001 2000 2001 2000 (Decrease) Rate Volume
(Dollars in thousands) ----------- ----------- ----- ----- ---------- ---------- --------- --------- --------
Assets
Securities (1):
U.S. Treasury,
government and other
(5)..................... $14,697,389 $14,055,723 7.11% 6.78% $ 783,776 $ 714,300 $ 69,476 $ 36,155 $ 33,321
States and political
subdivisions............ 1,070,435 1,104,553 7.34 7.52 58,957 62,304 (3,347) (1,452) (1,895)
----------- ----------- ----- ----- ---------- ---------- --------- --------- --------
Total securities (5).... 15,767,824 15,160,276 7.13 6.83 842,733 776,604 66,129 34,703 31,426
Other earning assets
(2)...................... 460,558 457,240 4.34 6.47 14,947 22,160 (7,213) (7,359) 146
Loans and leases, net of
unearned income
(1)(3)(4)(5)............. 46,309,178 41,416,871 8.67 9.29 3,004,150 2,882,332 121,818 (201,333) 323,151
----------- ----------- ----- ----- ---------- ---------- --------- --------- --------
Total earning assets.... 62,537,560 57,034,387 8.25 8.62 3,861,830 3,681,096 180,734 (173,989) 354,723
----------- ----------- ----- ----- ---------- ---------- --------- --------- --------
Non-earning assets...... 5,694,308 4,072,516
----------- -----------
Total assets........... $68,231,868 $61,106,903
=========== ===========
Liabilities and
Shareholders' Equity
Interest-bearing
deposits:
Savings and interest-
checking................ $ 3,422,254 $ 4,004,166 1.59 1.90 40,689 56,838 (16,149) (8,484) (7,665)
Money rate savings...... 12,320,263 10,267,376 2.84 3.61 262,106 277,499 (15,393) (64,925) 49,532
Time deposits........... 22,275,306 20,962,772 5.71 5.69 950,960 892,672 58,288 3,088 55,200
----------- ----------- ----- ----- ---------- ---------- --------- --------- --------
Total interest-bearing
deposits................ 38,017,823 35,234,314 4.41 4.65 1,253,755 1,227,009 26,746 (70,321) 97,067
Short-term borrowed
funds.................... 6,226,380 6,966,872 4.35 5.85 202,658 305,061 (102,403) (72,227) (30,176)
Long-term debt........... 10,792,831 7,301,915 5.64 6.02 455,156 329,251 125,905 (22,216) 148,121
----------- ----------- ----- ----- ---------- ---------- --------- --------- --------
Total interest-bearing
liabilities............. 55,037,034 49,503,101 4.64 5.02 1,911,569 1,861,321 50,248 (164,764) 215,012
----------- ----------- ----- ----- ---------- ---------- --------- --------- --------
Noninterest-bearing
deposits................ 6,086,614 5,911,277
Other liabilities....... 1,423,355 838,252
Shareholders' equity.... 5,684,865 4,854,273
----------- -----------
Total liabilities and
shareholders' equity.... $68,231,868 $61,106,903
=========== ===========
Average interest rate
spread................... 3.61 3.60
Net yield on earning
assets................... 4.16% 4.26% $1,950,261 $1,819,775 $ 130,486 $ (9,225) $139,711
===== ===== ========== ========== ========= ========= ========
Taxable equivalent
adjustment............... $ 147,927 $ 79,695
========== ==========
----
(1) Yields related to securities, loans and leases exempt from income taxes
are stated on a taxable equivalent basis assuming tax rates in effect for
the periods presented.
(2) Includes Federal funds sold and securities purchased under resale
agreements or similar arrangements.
(3) Loan fees, which are not material for any of the periods shown, have been
included for rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances. Only the
interest collected on such loans has been included as income.
(5) Includes assets which were held for sale or available for sale at
amortized cost and trading securities at estimated fair value.
27
Noninterest Income
Noninterest income for the three months ended September 30, 2001, was $335.7
million compared to $90.8 million for the same period in 2000, an increase of
$244.9 million, or 269.8%. This increase was principally the result of losses
totaling $181.4 million incurred in the third quarter of 2000 as a result of a
restructuring of the company's securities portfolio. Additionally, noninterest
income increased due to substantially higher mortgage banking income, growth in
service charges on deposits, increased trust revenue, growth in insurance
commissions from BB&T's agency network, and higher investment banking fees.
Excluding nonrecurring items and the growth in noninterest income that resulted
from the timing of purchase accounting transactions, noninterest income would
have increased 18.7% in the third quarter of 2001 compared to the third quarter
of 2000. For the nine months, noninterest income was $1.0 billion, an increase
of $445.2 million, or 78.2%, compared to the same period in 2000. The increase
in noninterest income for the period ended September 30, 2001, resulted
primarily from higher mortgage banking income, growth in service charges on
deposits, increased trust revenue, and increased insurance commissions.
Additionally, noninterest income for 2001 includes a gain from the sale of
BB&T's ownership interest in an electronic payment processing company.
Excluding nonrecurring items and growth due to purchase accounting
transactions, noninterest income would have increased 17.5% for the period
ended September 30, 2001.
Noninterest income, excluding nonrecurring items, as a percentage of net
interest income plus noninterest income excluding nonrecurring items, or the
"fee income ratio", was 33.2% for the third quarter of 2001, compared to 30.5%
in the third quarter of 2000. For the nine months ended September 30, 2001 and
2000, the fee income ratio was 33.1% and 30.3%, respectively. This increase
indicates that BB&T is deriving a greater percentage of its revenues from
noninterest income sources. It is a primary goal of BB&T to increase this
ratio, as it provides a source of income less dependent on movements in
interest rates.
Service charges on deposits totaled $88.4 million for the third quarter of
2001, an increase of $12.4 million, or 16.3%, compared to the third quarter of
2000. For the nine months, service charges on deposits totaled $256.0 million,
an increase of $41.4 million, or 19.3%, compared to the first nine months of
2000. The largest components of the growth within service charges on deposits
in the 2001 period were NSF and overdraft charges on personal accounts and
account analysis fees on commercial accounts, which contributed $6.6 million
and $7.0 million, respectively, to the increase in the third quarter of 2001
compared to 2000. BankFirst Corporation of Knoxville, Tennessee ("BankFirst"),
was acquired and accounted for as a purchase on December 27, 2000, which
contributed $1.2 million to the increase in service charges on deposits in the
third quarter of 2001 compared to the prior year quarter. Additionally,
FirstSpartan was acquired and accounted for as a purchase on March 2, 2001,
which contributed .7 million. The 19.3% increase in service charges on deposits
for the nine months of 2001 was driven primarily by the same factors that
affected quarterly growth.
Trust income totaled $22.9 million for the current quarter, an increase of
$1.7 million, or 7.9%, compared to the same period a year ago. For the nine
months, trust income totaled $71.9 million, an increase of $10.7 million, or
17.5%, compared to the same period in 2000. The increase in trust income for
both the quarter and the nine months reflects healthy growth in personal and
corporate trust fees compared to 2000. Assets under management totaled $14.3
billion at September 30, 2001, down from $16.3 billion at September 30, 2000.
The decline in the value of assets under management was the result of the
significant decline in the market value of equity securities over the same time
frame. Between September 30, 2000 and September 30, 2001, the Dow Jones
Industrial Average decreased 16.9%, the Standard & Poor's 500 Index decreased
27.5% and the NASDAQ index decreased 59.2%.
Investment banking and brokerage fees and commissions totaled $43.6 million
during the third quarter of 2001, an increase of $6.7 million, or 18.1%,
compared to the third quarter of 2000. For the nine months, investment banking
and brokerage fees and commissions totaled $129.5 million, an increase of $5.0
million, or 4.0%, compared to the same period in 2000. The increase in this
category of revenue for the third quarter and the nine month period of 2001
resulted primarily from the acquisition of Edgar M. Norris & Co., an
28
independent broker/dealer based in Greenville, South Carolina, which was
purchased on November 15, 2000. This acquisition was accounted for as a
purchase; therefore its operating results were only included in BB&T's accounts
in periods following the acquisition.
Agency insurance commissions totaled $44.2 million for the third quarter of
2001, an increase of $5.4 million, or 14.0%, compared to the same three-month
period of 2000. For the nine months, agency insurance commissions totaled
$131.2 million, an increase of $24.0 million, or 22.4%, compared to the same
period in 2000. The growth in revenue resulted from the purchase of additional
agencies during 2000 and 2001, as well as internal growth. During the third
quarter of 2001, property and casualty insurance commissions increased $4.9
million. The 22.4% increase in agency insurance commissions for the nine months
of 2001 was driven by the same factors that affected quarterly growth.
Income from mortgage banking activities totaled $51.8 million for the third
quarter of 2001, an increase of $27.2 million, or 110.6%, compared to the same
period of 2000. For the nine months, mortgage banking activities totaled $108.9
million, an increase of $31.3 million, or 40.3%, compared to the same period in
2000. These substantial increases resulted from higher mortgage loan
originations in 2001, which have resulted from the lower interest rate
environment. During the first nine months of 2001, BB&T has originated $7.1
billion of mortgage loans compared to $3.3 billion in the nine month period for
2000. These higher mortgage loan volumes produced increased mortgage banking
fees. Servicing fee income increased $3.0 million; origination fees on loans
sold increased $7.7 million; commercial loan servicing income increased $4.3
million; and gains from loan sales increased $11.6 million.
Other nondeposit fees and commissions totaled $48.4 million for the third
quarter of 2001, an increase of $5.7 million, or 13.2%, compared to the three
months ended September 30, 2000. For the nine months, other nondeposit fees and
commissions totaled $141.5 million, an increase of $22.4 million, or 18.8%,
compared to the same period in 2000. The principal drivers of the increase
were: higher income from the outsourcing of official checks, which added $2.4
million to revenue for the quarter; check card interchange fees, which
increased $1.4 million; commercial standby letter of credit fees, which
increased $.4 million; and bankcard income, which increased $1.5 million. The
18.8% increase in other nondeposit fees and commissions for the nine months of
2001 was primarily driven by the same factors that affected quarterly growth.
BB&T realized a $2.4 million gain from sales of securities in the third
quarter of 2001 compared to a loss of $180.8 million in the third quarter last
year. The loss recorded in the third quarter of 2000 includes $181.4 million
related to the previously discussed restructuring. For the nine months, BB&T
recorded an $91.8 million gain in 2001, compared to a loss of $221.9 million in
2000. The 2001 gain includes a $76.1 million gain from the sale of BB&T's
ownership interest in an electronic payment processing company.
Other income totaled $30.9 million for the third quarter of 2001, an
increase of $3.5 million, or 12.9%, compared to the same period one year ago.
Bank owned life insurance income increased $5.3 million and income from an
executive deferred compensation program decreased $2.0 million. For the nine
months ended 2001 and 2000, other income totaled $74.2 million and $75.6
million, respectively.
Noninterest Expense
Noninterest expenses totaled $582.2 million for the third quarter of 2001
compared to $536.1 million for the same period a year ago, an increase of $46.2
million, or 8.6%. Noninterest expense for the third quarter of 2001 includes
$67.2 million of nonrecurring expenses principally associated with the
acquisition of F&M National Corporation and costs incurred in connection with
the integration of other recently completed acquisitions. Excluding these costs
and nonrecurring charges, noninterest expenses would have totaled
$515.0 million, an increase of $51.5 million, or 11.1%, over the same period
one year ago. Excluding the effects of business combinations accounted for as
purchases that were completed in the last three months of 2000 and first nine
months of 2001, and the aforementioned nonrecurring expenses, noninterest
expenses for the third quarter of 2001 would have increased 6.0% from the
comparable period of 2000. For the nine months
29
ended September 30, 2001, noninterest expenses totaled $1.7 billion, an
increase of $157.8 million, or 10.3%, over the same period one year ago.
Noninterest expense for the first nine months of 2001 includes $175.2 million
of nonrecurring merger-related charges. Excluding these costs, noninterest
expenses would have totaled $1.5 billion, an increase of $111.6 million, or
8.0%, over the first nine months of 2000. Excluding the effects of business
combinations accounted for as purchases and the effect of nonrecurring charges,
noninterest expenses for the first nine months of 2001 would have actually
increased 3.0% from the comparable period of 2000.
BB&T's efficiency ratio (noninterest expenses, excluding the nonrecurring
expenses referred to above and costs related to foreclosed assets, as a
percentage of FTE net interest income plus noninterest income excluding
nonrecurring items and securities gains and losses) improved to 51.4% for the
third quarter of 2001 compared to 52.2% for the third quarter of 2000. For the
nine months, the efficiency ratio improved to 51.7% compared to 53.4% in 2000.
Personnel expense, the largest component of noninterest expense, was $296.6
million for the third quarter of 2001 compared to $269.7 million for the same
period in 2000, an increase of $26.9 million, or 10.0%. These amounts include
merger-related costs of $14.4 million in the third quarter of 2001 and $17.2
million in the third quarter of 2000. Excluding the merger-related charges,
personnel expense in the 2001 quarter would have increased $29.8 million, or
11.8%, from the 2000 period. This increase was primarily the result of the
effect of purchase acquisitions, which added costs of $12.3 million; an
increase of $10.8 million in incentive compensation; an increase in pension
expense of $1.6 million; and an increase of $1.1 million in fees for temporary
services. Excluding the effects of the merger-related charges and purchase
acquisitions, personnel expense for the third quarter of 2001 would have
increased $17.4 million, or 6.9%, over the third quarter of 2000. For the nine
months, personnel expense totaled $880.3 million, an increase of $88.9 million,
or 11.2%, compared to 2000. Excluding merger-related charges, personnel expense
for the first nine months of 2001 would have increased $78.2 million, or 10.3%,
compared to 2000. Excluding merger-related charges and purchase accounting
transactions, personnel expense for the first nine months of 2001 would have
increased 5.6% for the reasons outlined above.
Occupancy and equipment expense for the three months ended September 30,
2001, totaled $84.4 million, an increase of $4.4 million, or 5.5%, compared to
2000. These amounts include merger-related charges of $4.7 million in the third
quarter of 2001 and $8.3 million in the third quarter of 2000. Excluding the
merger-related charges, occupancy and equipment expense would have been $79.7
million, an increase of $8.0 million, or 11.1%, compared to the same period in
2000. This growth included the effect of acquisitions completed in the last
quarter of 2000 and first three quarters of 2001 that were accounted for as
purchases. Excluding the effects of the merger-related charges and purchase
acquisitions, occupancy and equipment expense for the third quarter of 2001
would have increased $5.5 million, or 7.7%, over the third quarter of 2000. The
increase was the result of an increase in communications equipment expense and
information technology equipment expense. For the nine months, occupancy and
equipment expense totaled $247.8 million, an increase of $18.8 million, or
8.2%, compared to 2000. These amounts include merger-related charges of $17.1
million and $16.9 million for 2001 and 2000, respectively. Excluding the
merger-related charges, occupany and equipment expense would have been $230.7
million and $212.0 million for 2001 and 2000, respectively, reflecting growth
of 8.8%. This growth includes the effect of acquisitions completed in the last
quarter of 2000 and first three quarters of 2001 that were accounted for as
purchases. Excluding the effects of the merger-related charges and purchase
acquisitions, occupancy and equipment expense for the nine months of 2001 would
have increased $11.4 million, or 5.4%, over the nine months of 2000 for the
same reasons affecting quarterly growth.
The amortization of goodwill and other intangible assets totaled $20.1
million for the three months ended September 30, 2001, an increase of $4.1
million, or 25.8%, from the amount incurred in the third quarter of 2000. For
the nine months, amortization of intangible assets totaled $56.4 million, an
increase of $8.3 million, or 17.2%, compared to 2000. This increase is
primarily due to the acquisitions of BankFirst in the fourth quarter of 2000,
FirstSpartan in the first quarter and VCAP in the second quarter of 2001, all
of which were consummated using purchase accounting.
30
Other noninterest expenses for the third quarter of 2001 totaled $181.2
million, an increase of $10.8 million, or 6.3%, compared to 2000. These amounts
include merger-related costs of $48.1 million in the third quarter of 2001 and
$47.0 million in the third quarter of 2000. Excluding these costs, other
noninterest expenses for the three months ended September 30, 2001 would have
been $134.6 million, an increase of $11.2 million, or 9.0%, from the comparable
2000 period. This increase is due to amortization of mortgage servicing rights,
which increased $7.3 million, and the acquisitions of FirstSpartan, BankFirst,
and VCAP, consummated using purchase accounting, which added $8.7 million to
other noninterest expense. Offsets to this increase include reductions in
expenses relating to staff welfare, employee recruiting, printing, and
provision for factoring losses, which decreased a collective $3.7 million. For
the nine months ended 2001, other noninterest expenses totaled $500.2 million,
an increase of $41.8 million, or 9.1%, over 2000. These amounts include merger-
related charges of $116.8 million for 2001 and $81.5 million for 2000.
Excluding these costs, other noninterest expenses for the nine months ended
September 30, 2001, would have been $385.0 million, an increase of $8.0 million
from the comparable 2000 period.
Provision for Income Taxes
The provision for income taxes totaled $85.3 million for the third quarter
of 2001, an increase of $57.7 million, or 209.1%, compared to the third quarter
of 2000. For the first nine months of 2001, the provision for income taxes
totaled $277.0 million, an increase of $60.7 million, or 28.1%, compared to
2000. Excluding the tax benefits associated with merger-related charges and
other nonrecurring items from all periods presented, the provision for income
taxes would have been $116.0 million during the third quarter and
$335.4 million for the nine months ended September 30, 2001, and $119.0 million
and $344.8 million for the third quarter and nine months of 2000, respectively.
These amounts represent a decrease of $3.0 million, or 2.5%, compared to the
third quarter of 2000, and a decrease of $9.4 million, or 2.7%, compared to the
first nine months of 2000. The effective tax rates on pretax income were 27.8%
and 27.6% for the three months ended September 30, 2001 and 2000, respectively,
and 28.5% and 31.7% for the nine months of 2001 and 2000, respectively.
Excluding the effect of merger-related charges and other nonrecurring items on
pretax income and the income tax provision, BB&T's effective income tax rates
were 29.0% and 32.4% for the three months ended September 30, 2001 and 2000,
respectively, and 29.2% and 32.7% for the nine months of 2001 and 2000,
respectively. During the first three quarters of 2001, BB&T transferred
responsibility for the management of certain operations to a subsidiary in a
tax-advantaged jurisdiction, thereby lowering the effective income tax rate
applicable to certain lease investments. In accordance with SFAS No. 13,
"Accounting for Leases", the net income from the affected leases was
recalculated from inception based on the new effective income tax rate. The
recalculation had the effect of reducing net interest income and the tax
provision for 2001, as reflected in the lower effective tax rates. BB&T intends
to permanently reinvest the earnings of this subsidiary and, therefore, in
accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes",
deferred income taxes associated with the current year's income tax benefit
have not been provided.
31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The nature of the business of BB&T's banking subsidiaries ordinarily results
in a certain amount of litigation. The subsidiaries of BB&T are involved in
various legal proceedings, all of which are considered incidental to the normal
conduct of business. Management believes that the liabilities arising from
these proceedings will not have a materially adverse effect on the consolidated
financial position or consolidated results of operations of BB&T.
Item 6. Exhibits and Reports on Form 8-K
(a)
EXHIBIT INDEX
Exhibit No. Description Location
----------- ---------------------------------------------------- --------------------------
2(a) Agreement and Plan of Reorganization dated as of Incorporated herein by
July 29, 1994 and amended and restated as of October reference to Registration
22, 1994 between the Registrant and BB&T Financial No. 33-56437.
Corporation.
2(b) Plan of Merger as of July 29, 1994 as amended and Incorporated herein by
restated on October 22, 1994 between the Registrant reference to Registration
and BB&T Financial Corporation. No. 33-56437.
2(c) Agreement and Plan of Reorganization dated as of Incorporated herein by
November 1, 1996 between the Registrant and United reference to Exhibit 3(a)
Carolina Bancshares Corporation, as amended. filed in the Annual Report
on Form 10-K, filed March
17, 1997.
2(d) Agreement of Plan of Reorganization dated as of Incorporated herein by
October 29, 1997 between the Registrant and Life reference to Registration
Bancorp, Inc. No. 33-44183.
2(e) Agreement and Plan of Reorganization dated as of Incorporated herein by
February 6, 2000 between the Registrant and One reference to Exhibit 99.1
Valley Bancorp, Inc. filed in the Current
Report on Form 8-K, dated
February 9, 2000.
3(a)(i) Amended and Restated Articles of Incorporation of Incorporated herein by
the Registrant, as amended. reference to Exhibit 3(a)
filed in the Annual Report
on Form 10-K, filed March
17, 1997.
3(a)(ii) Articles of Amendment of Articles of Incorporation. Incorporated herein by
reference to Exhibit
3(a)(ii) filed in the
Annual Report on Form 10-
K, filed March 18, 1998.
3(b) Bylaws of the Registrant, as amended. Incorporated herein by
reference to Exhibit 3(b)
filed in the Annual Report
on Form 10-K, filed March
18, 1998.
4(a) Articles of Amendment to Amended and Restated Incorporated herein by
Articles of Incorporation of the Registrant related reference to Exhibit 3(a)
to Junior Participating Preferred Stock. filed in the Annual Report
on Form 10-K, filed March
17, 1997.
32
4(b) Rights Agreement dated as of December 17, 1996 Incorporated herein by
between the Registrant and Branch Banking and Trust reference to Exhibit 1
Company, Rights Agent. filed under Form 8-A,
filed January 10, 1997.
4(c) Subordinated Indenture (including Form of Incorporated herein by
Subordinated Debt Security) between the Registrant reference to Exhibit 4(d)
and State Street Bank and Trust Company, Trustee, of Registration No. 333-
dated as of May 24, 1996. 02899.
4(d) Senior Indenture (including Form of Senior Debt Incorporated herein by
Security) reference to Exhibit 4(c)
between the Registrant and State Street Bank and of Registration No. 333-
Trust company, Trustee, dated as of May 24, 1996. 02899.
10(a)* Death Benefit Only Plan, Dated April 23, 1990, by Incorporated herein by
and between Branch Banking and Trust Company (as reference to Registration
successor to Southern National Bank of North No. 33-33984.
Carolina)
and L. Glenn Orr, Jr.
10(b)* BB&T Corporation Non-Employee Directors' Deferred Incorporated herein by
Compensation and Stock Option Plan. reference to Exhibit 10(b)
of the Annual Report on
Form 10-K, filed March 17,
1997.
10(c)* BB&T Corporation 1994 Omnibus Stock Incentive Plan. Incorporated herein by
reference to Registration
No. 33-57865.
10(d)* Settlement and Non-Compete Agreement, dated February Incorporated herein by
28, 1995, by and between the Registrant and L. Glenn reference to Registration
Orr, Jr. No. 33-56437.
10(e)* Settlement Agreement, Waiver and General Release Incorporated herein by
dated September 19, 1994, by and between the reference to Registration
Registrant, Branch Banking and Trust Company (as No. 33-56437.
successor to Southern National Bank of North
Carolina) and Gary E. Carlton.
10(f) BB&T Corporation 401(k) Savings Plan (amended Incorporated herein by
effective January 1, 2000). reference to Exhibit 10(f)
in BB&T Corporation's
Annual Report on Form 10-K
filed on March 16, 2001.
10(g)* BB&T Corporation 1995 Omnibus Stock Incentive Plan. Incorporated herein by
reference to Exhibit 10(g)
filed in the Annual Report
on Form 10-K, filed March
17, 1997.
10(h)* Form of Branch Banking and Trust Company Long-Term Incorporated by reference
Incentive Plan. to the identified exhibit
under the Quarterly Report
on Form 10-Q, filed May
14, 1991.
10(i)* Form of Branch Banking and Trust Company Executive Incorporated by reference
Incentive Compensation Plan. to the identified exhibit
under the Annual Report on
Form 10-K, filed February
22, 1985.
33
10(j)* Southern National Deferred Compensation Plan for Key Incorporated herein by
Employees. reference to Exhibit 10(j)
filed in the Annual Report
on Form 10-K, filed March
17, 1997.
10(k)* BB&T Corporation Target Pension Plan. Incorporated herein by
reference to Exhibit 10(k)
filed in the Annual Report
on Form 10-K, filed March
17, 1997.
10(l)* BB&T Corporation Supplemental Executive Retirement Incorporated herein by
Plan. reference to Exhibit 10(l)
filed in the Annual Report
on Form 10-K, filed March
17, 1997.
10(m)* Settlement and Noncompetition Agreement, dated July Incorporated herein by
1, 1997, by and between the Registrant and E. Rhone reference to Exhibit 10(m)
Sasser. filed in the Annual Report
on Form 10-K, filed March
18, 1998.
10(n)* BB&T Corporation Supplemental Defined Contribution Incorporated herein by
Plan for Highly Compensated Employees. reference to Registration
No. 333-69823.
10(o)* Scott & Stringfellow, Inc. Executive and Employee Incorporated herein by
Retention Plan. reference to Registration
No. 333-81471.
10(p)* BB&T Corporation Non-Qualified Defined Contribution Incorporated herein by
Plan. reference to Registration
No. 333-50035.
10(q)* BB&T Corporation Amended and Restated 1996 Short- Incorporated herein by
term Incentive Plan. reference to Exhibit 10(q)
in BB&T Corporation's
Quarterly Report on Form
10-Q filed on May 11,
2001.
10(r)* Amendment to 1995 Omnibus Stock Incentive Plan. Incorporated herein by
reference to Registration
No. 333-36540.
10(s)* Employment Agreement dated February 6, 2000, by and Incorporated herein by
between the Registrant and J. Holmes Morrison. reference to Exhibit 10(s)
in BB&T Corporation's
Annual Report on Form 10-K
filed on March 16, 2001.
10(t) BB&T Corporation Pension Plan (amended effective Incorporated herein by
January 1, 2000). reference to Exhibit 10(t)
in BB&T Corporation's
Annual Report on Form 10-K
filed on March 16, 2001.
34
10(u)* Amendment to BB&T Corporation Nonqualified Defined Incorporated herein by
Contribution Plan. reference to Exhibit 10(u)
in BB&T Corporation's
Annual Report on Form 10-K
filed on March 16, 2001.
10(v)* Amendment to BB&T Corporation Non-Employee Incorporated herein by
Directors' Deferred Compensation and Stock Option reference to Exhibit 10(v)
Plan. in BB&T Corporation's
Annual Report on Form 10-K
filed on March 16, 2001.
10(w)* Amendment to the BB&T Corporation Supplemental Incorporated herein by
Defined Contribution Plan for Highly Compensated reference to Exhibit 10(w)
Employees. in BB&T Corporation's
Annual Report on Form 10-K
filed on March 16, 2001.
11 Statement re Computation of Earnings Per Share. Filed herewith as Note E.
22 Proxy Statement for the 2001 Annual Meeting of Incorporated herein by
Shareholders. reference to BB&T
Corporation's Proxy
Statement filed on March
16, 2001.
* Management compensatory plan or arrangement.
(b) Current Reports on Form 8-K during and following the quarter ended
September 30,
2001.
On July 10, 2001, BB&T filed a Current Report on Form 8-K under Item 5 to
announce that BB&T had entered into a definitive agreement to acquire Community
First Banking Company of Carrollton, Georgia, and to file certain presentation
material related to this transaction. On July 12, 2001, BB&T filed a Current
Report on Form 8-K under Item 5 to report the results of operations for the
second quarter of 2001. On July 25, 2001, BB&T filed a Current Report on Form
8-K under Item 5, which was amended on July 27, 2001, to report BB&T's results
of operations and financial condition restated for the accounts of Century
South Banks, Inc., which merged into BB&T on June 7, 2001. On July 31, 2001,
BB&T filed a Current Report on Form 8-K under Item 5 to announce a public
offering of debt securities and to file the related underwriting agreement. On
October 5, 2001, BB&T filed a Current Report on Form 8-K under Item 5, to
report BB&T's results of operations and financial condition restated for the
accounts of F&M National Corporation, which merged into BB&T on August 9, 2001.
On October 11, 2001, BB&T filed a Current Report on Form 8-K under Item 5 to
report the results of operations for the third quarter of 2001.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BB&T CORPORATION
(Registrant)
Date: November 14, 2001 By: /s/ Scott E. Reed
Scott E. Reed, Senior Executive Vice
President and Chief Financial
Officer
Date: November 14, 2001 By: /s/ Sherry A. Kellett
Sherry A. Kellett, Senior Executive
Vice
President and Controller
(Principal Accounting Officer)
36